Fed View: Preparing the market for a more uncertain world – In a speech last Friday, New York Fed president John Williams discussed his latest views on monetary policy normalisation, describing it as a three stage process, with the Fed now seemingly in (or at least approaching) the final stage. Similar to Chair Powell at last week’s FOMC press conference, he sought to downplay the significance of the Committee removing reference to rates still being accommodative from the September policy statement. At the same time, he said “r-star has actually gotten too much attention in commentary about Fed policy” and that “as we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur,” and that this reflects the inherent uncertainty around neutral rate estimates. This was significant for Williams, as he has long been a key proponent of the neutral rate as a concept (see The neutral rate: What it means for Fed policy and bond markets, 23 May 2018).
This downplaying of monetary policy guides started with Chair Powell’s Jackson Hole speech in August, where not only the neutral rate was downplayed, but also the NAIRU. Taken together, it suggests to us a conscious attempt by the Fed to prepare the market for a more uncertain, more data-dependent monetary policy in the coming years. It also suggests that the weight we put in the ‘dots’ projections should be less than it has been until now. In other words, the Fed may still have a base case on where rates are going, but the conviction level in that base case is on the decline. We expect the Fed to hike a further three times until next June. However, as we get closer to the expected pause in policy, we believe the Fed will become increasingly sensitive to the evolution of the data and to the economic outlook – in both directions. (Bill Diviney)
ECB View: Share of private sector QE purchases rise – The Eurosystem stepped up its net QE purchases in September, which was the last month during which it needed to buy EUR 30bn of government bonds, corporate bonds, covered bonds and ABS. The monthly data revealed that the central bank managed to buy EUR 29.7bn of bonds last month, which compared to EUR 24.8bn in August. On a cumulative basis, the Eurosystem has settled EUR 2,550 trillion of bond purchases, which is exactly in line with the total net cumulative net purchases targeted since the start of QE. The central bank had been frontloading QE purchases, but now it can no longer benefit from this advantage. Having said that, net purchases has dropped to EUR 15bn per month in Q4, so it should become easier for the Eurosystem to reach its monthly target.
What stood out for us was that the private sector programmes regained ground in the total programme (except for the ABSPP, which has remained marginal more generally). Indeed, the Eurosystem purchases EUR 4.2bn of corporate bonds on a net basis in September, which was 14% of total purchases, while it compared to EUR 1.5bn of purchases in August. The share of covered bonds in total net purchases rose to 9%, up from 5% during the previous two months. This is in line with the central bank’s communication that the private sector programmes would remain sizeable.
Looking forward, the amounts purchases by the central bank will be reduced, in line with the reduction in the monthly target size. However, we think that the slowdown will again be focussed on the PSPP, as the central bank is increasingly reaching its limits in executing the PSPP. So far this year, the share of the PSPP in net purchases has dropped to on average 77%, compared to 84% last year. Meanwhile, the share of the CSPP has risen to 15% (2017: 10%) and that of the CBPP3 to 7% (was 5%). (Joost Beaumont)