FOMC preview: Will panel offer clearer forward guidance?

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While this week's Federal Open Market Committee meeting won't result in a rate change, experts are looking at various clues for the future, and to see if the panel follows through on its talk about "more explicit" forward guidance.

Brian Haywood, investment strategy advisor at Buckingham Wealth Partners, noted “all signs” point to the Fed leaving the target rate unchanged at a range between zero and 0.25%. “It will be important to see if the FOMC provides any explicit form of forward guidance for the trajectory of the fed funds target rate,” he said. “This will be important to watch as the June Fed minutes noted that ‘most’ committee members agreed that the FOMC ‘should communicate a more explicit form of forward guidance for the path of the federal funds rate … as more information about the trajectory of the economy becomes available.’”

Also noteworthy would be any discussion of yield curve control, Haywood said. “Given the June minutes showed almost all participants had questions regarding the cost and benefits of YCC I do not believe we will see the committee adopt YCC at [the] meeting,” he said.

The way the FOMC characterizes "the underlying economic weakness” will interest Jeff Klingelhofer, co-head of investments and portfolio manager at Thornburg Investment Management. “I believe the current challenges would be best met with fiscal measures, not more stimulus from the Fed But, if political gridlock continues, all eyes will be on the Fed step in and save the day.”

With “extraordinarily low” interest rates, and bankruptcies climbing, Richard Barrington, senior financial analyst for MoneyRates.com, said, “It will be interesting to see if there is any comment on how the Fed views the impact of its credit facilities in getting lenders to continue to make loans and provide forbearance on existing loans.”

He is also curious whether the Fed will provide more than its usual boilerplate language about seeking to maintain full employment and an inflation rate of 2%. “In the current crisis, full employment is a pipe dream and the inflation rate is bouncing around so erratically from month to month it’s impossible to get a real read on,” he said. “So, it might be timely for the Fed to adapt its message to more immediate goals of 1) viewing its goals for the job market on more of a state-by-state basis, according to which areas are allowing businesses to operate on a reasonably normal level, and 2) at least stabilizing the inflation (or deflation) rate for the time being rather than seeking a near-term return to the 2% goal.”

The meeting will yield no surprises, according to Bill Callahan, investment strategist, Schroders. “Markets continue to expect ultra-accommodative policy from the Fed, and the Fed is unlikely to disappoint at this meeting.”

Any comments that “hint at a desire to normalize policy as soon as possible will likely be taken as hawkish,” and cause a backlash, he said, “but I see very little chance of that happening.”

His advice? "Investors should be positioning their portfolios for negative real rates for a long time to come.”

The Fed seems to be “awaiting further economic data to enact a meaningful shift in policy,” said Matt Lindholm, managing director, CAZ Investments. “We believe the Fed will continue its aggressive push for further fiscal stimulus. FOMC members have repeatedly stressed that Congress needs to pass an additional spending bill, and we expect that stance to be reiterated at the July meeting,” he said. “This meeting is likely to center around debate on future policy rather than on immediate policy.”

As far as negative rates and yield curve control, Lindholm does not see either of these coming to fruition. “Negative nominal rates may be discussed again briefly, and would certainly surprise the market, but we do not believe the Fed is seriously considering that policy at the moment,” he said. “Although we do not expect yield curve control to be implemented in the near term, we do think it will be discussed as a potential mitigant in late 2020 or 2021 if the economic situation worsens.”

Jason Celente, senior portfolio manager at Insight Investment, believes the post-meeting statement needs to assure continued accommodative monetary policy. "Lower borrowing costs and positive wealth effects helps create an improved environment for business confidence and, ultimately, hiring," he said.

“We expect that the bond buying program will continue to be characterized as open-ended to signal prolonged support,” he said. “Since we know that markets are piggish, a modest inclusion of 'financial market functioning and credit conditions' to the developments being monitored may introduce the right amount of dovishness to the statement.”

Any characterization of economic improvement would be seen as hawkish, Celente said.

As several officials have recently, the Fed is likely to signal it would welcome inflation moderately above it's 2% target for a time once the economy has recovered, according to Eric Kelley, executive vice president of research at UMB. “It would be quite a surprise (and a negative one), if the Fed speaks in terms of ‘stronger than expected’ results in the economy and/or creates any uncertainty about interest rates remaining at zero for the next 18 months," he said. "Commentary will likely tilt toward uncertainty and the need for ongoing support.”

Any negative interest rate consideration would surprise MoneyRates.com's Barrington. “So far the FOMC has been cool to the idea. Interest rates do not appear to be the problem that is holding back economic activity in the current environment, and negative could backfire by having a disruptive effect on the banking system and providing a disincentive to lend,” he said.

“Some market participants have advocated for negative interest rates but this may simply be because negative rates would artificially inflate asset prices," he continued. "So, while even a hint of the possibility of negative rates in [the] announcement might give the markets a short-term thrill, it seems unlikely, because the FOMC is more concerned with longer-term policy considerations than with bolstering financial markets that have been incredibly buoyant so far.”

Durable goods
Durable goods orders rose 7.3% in June, after a15.1% rise in May, the Commerce Department said Monday.

Excluding transportation, orders rose 3.3% in the month, following a 3.6% gain in May.

Economists polled by IFR estimated orders would rise 7.2% and climb 3.5% excluding transportation orders.

Texas manufacturing survey
Manufacturing activity in the Texas region “continued to expand” in July, according to the Federal Reserve Bank of Dallas' Texas Manufacturing Outlook Survey.

The production index, grew to 16.1 from 13.6, while the new orders index rose to 6.9 from 2.9.

The capacity utilization and shipments indexes moved higher to 14.0 and 17.3, respectively, their highest readings in nearly a year, from 7.6 and 3.1 in June.

The general business activity index narrowed to negative 3.0 from negative 6.1 and the company outlook index increased to 5.9 from 2.7.

The employment rebounded to positive 3.1 from negative 1.5.

The future production index fell to 37.2 from 38.7, while the future general business activity index declined to 10.6 from 19.7.

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Monetary policy FOMC Federal Reserve Federal Reserve Bank of Dallas Economic indicators Manufacturing industry
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