Fed minutes may offer clues on thinking, yield curve control

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With interest rates near zero and not expected to move from there for a while, economists said they are looking for clues about yield curve control and continued discussion of going negative in the Federal Open Market Committee's minutes from its April 29 meeting.

Joe Kalish, chief global macro strategist at Ned Davis Research Group, believes markets will be looking for any discussion on yield curve control, among other things.

“I will be looking to see if economic risks are tilted to the downside and that additional fiscal support will be needed,” he said. “Markets will also be watching for any discussion of new credit programs or modifications to existing programs and any discussion on negative interest rates.”

Edward Moya, senior market analyst at OANDA, said the minutes will show the Fed will not be changing forward guidance anytime soon. The Summary of Economic Projections will be updated at the June meeting and that could be when they begin to discuss “yield curve control.”

“Following a barrage of emergency policy actions, the Fed’s last meeting saw no action,” Moya said. “The Fed’s swift action has bought them some time to wait and see how their massive amount of support will play out. Some policymakers may have pushed for a stronger monetary response and that could help bring forward some Fed fund future bets for negative rates.”

Fed fund futures contracts for the second half of 2021 recently dipped into negative territory, noted Megan Horneman, director of portfolio strategy at Verdence Capital Advisors in Hunt Valley, Md., raising speculation the Fed may be forced to implement negative interest rate policy.

“While the Fed put the rumors to rest for now, the debate will likely continue as the self-inflicted recession in the U.S. deepens,” she said. “With that in mind, I expect speculation to remain in the news headlines in the near term. Therefore, it is important for consumers to understand what a negative interest rate environment means and how it is even possible.”

Negative interest rates are a dangerous tool, she said, and should only be considered in a worst-case scenario. "It can have negative ramifications that are difficult to unwind for banks and consumers. In the U.S., it could be detrimental to the nearly $5 trillion money market mutual fund space."

Giles Coghlan, chief currency analyst at HYCM said he doesn’t believe the FOMC minutes are likely to reveal any new information.

“This is because since the last Fed meeting, Jerome Powell has been particularly vocal in his recent commentary and I think the most likely outcome is that the minutes will confirm that the Fed is prepared to take whatever action necessary towards supporting the economy in its attempt to bounce back from COVID-19,” Coghlan said. “That’s why we should expect the Fed to repeat a request for more fiscal stimulus.”

He added, the one aspect that would move markets and weaken the dollar would be any reference to negative interest rates.

“However, given that Jerome Powell has explicitly stated it will not be considering negative rates, such a scenario seems highly unlikely. In my mind, the most likely outcome from the minutes is a muted market reaction.”

Moya noted the Fed has signed off on nine different facilities to help the economy and provide lending power, but many details are still lacking on how some of the programs will work and how long they will last. “With the Fed already beginning the slowing of the pace of Treasury buying in April, investors will look for any signs that some policymakers are nervous demand for Treasuries will be lacking as the Fed pulls back.”

Housing starts
Housing starts plunged 30.2% in April to 891,000 from a revised 1.276 million in March, according to the U.S. Census Bureau and the Department of Housing and Urban Development. Year-over-year starts dropped 29.7%.

Economists surveyed by IFR Markets expected 950,000 starts and 1.000 million permits in the month.

Building permits sank 20.8% in the month to 1.074 million from March's 1.356 million, and are 19.2% below the April 2019 level of 1.330 million.

"Both single-family and multifamily starts dropped over the month due to the impacts from COVID-19-related social distancing efforts and declining construction activity," said Joel Kan, associate vice president of economic and industry at the Mortgage Bankers Association. "This was the lowest level of overall housing construction since 2013 — and is in line with the 12% year-over-year drop reported in MBA’s Builder Application Survey (BAS) last week. Permits for new construction were also down significantly over the month, but completions did not decline to the same extent, as projects in many parts of the country were allowed to continue."

While MBA expects "rapid rebound in housing activity later in the year," Kan said, "today’s news — combined with the April employment report showing almost one million construction job losses — may potentially slow the rebound in new construction that will be needed to completely revive the housing market.”

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