Floor on bond purchases a strong commitment… but for how long? – The most significant news from the June FOMC meeting was a commitment to continue expanding the balance sheet ‘at least at the current pace’, clarified by a New York Fed statement to mean c.$80bn per month in Treasury securities, and c.$40bn per month in MBS. This supplements the previous whatever-it-takes type guidance – still leaving upward flexibility, but giving assurance to the market that asset purchases would not dip below $120bn per month. For comparison, at the peak of QE3 the Fed was purchasing at a $85bn monthly pace. Given that the balance sheet has already expanded by $3trn since early March, this is an strong commitment, in our view. The only question mark is over how long these purchases might be sustained. On this, the wording ‘coming months’ is vague, and likely reflects the high degree of uncertainty in the outlook. Even so, combined with Chair Powell’s cautious read on last Friday’s payrolls surprise, we view the asset purchase floor as a strong sign from the Fed that it feels significant additional accommodation is still needed. 10y yields fell 4bp in the aftermath.
Rates near zero at least to 2022 – Underlining the uncertainty over the outlook, the range in the FOMC’s newly updated forecasts (the first such update since last December) is extremely wide. The median of the Committee projects a -6.5% contraction in 2020 (larger than both our and consensus forecasts), and 5.0% growth in 2021; this would leave output c.1.8pp below Q4 2019 levels, more pessimistic than our own forecasts (1.4pp below Q4 19). However, the 2020 forecasts range from -10% to -4.2%, and for 2021 from -1% to 7%. Underlining this, in the press conference Powell stated that Fed policy (and therefore its guidance) is being conducted to accommodate this range of potential outcomes rather than assuming a central scenario with any degree of confidence. In any case, the projections showed the Committee foreseeing no rate hikes for the next two & half years, with only two committee members penciling in 2022 rate hikes. Powell quipped that the Committee is ‘not even thinking about thinking about rate hikes’.
Yield caps do not look imminent – Finally, on yield caps, Powell was more cautious than we expected. While confirming that the policy is under active discussion, he also said that ‘whether to use yield curve control is still an open question’, suggesting a decision is not imminent. We suspect the Fed judged the floor under asset purchases would send a sufficiently strong signal for the time being, and that yield caps would potentially be more useful later in the year. Also contrary to our expectations, Powell’s appeals to Congress for increased fiscal support were not quite as direct as in the last press conference, although he acknowledged that FOMC members did assume some degree of additional fiscal stimulus in their forecasts, in the ‘lower end of the range’ of what is being discussed at the moment in Congress.