The Federal Open Market Committee meeting that began Tuesday, and concludes with a statement and a press conference from Federal Reserve Board Chair Jerome Powell, will be unique because rates remain at the zero lower bound and the Fed has taken many actions to ensure smooth markets since the economic shutdown to contain the coronavirus.
So what can we expect from the Fed?
“Credit markets will likely focus on how Powell characterizes the plans for the corporate bond facilities,” according to Tom Garretson, senior portfolio strategist fixed-income strategies for RBC Wealth Management’s Portfolio Advisory GroupU.S. “With primary markets largely reopened on elevated investment-grade new-issuance volumes, and with high yield corporate bond issuance nearing a 2020 high of nearly $40 billion month-to-date, up from just $4 billion in March, there may be questions about the take-up of the primary facility — particularly with a 1% facility fee.”
Garretson expects the Fed to announce “a more-flexible monthly purchase program [for Treasuries] north of $100 billion. While we expect the composition of Treasury purchases to eventually shift toward longer-duration as part of a concerted effort to provide stimulus via lower yields similar to the QE2 program — as opposed to recent purchases across the curve in the name of market liquidity — the Fed may wait until the June meeting when they will have more economic data, and an update to their economic projections and interest rate forecasts. A monthly program will give them more flexibility to go where any market stresses might necessitate them to.”
The panel’s assessment of the economy, is likely to reiterate Powell’s “recent optimism that there’s no reason that the economy can’t quickly recover following the end of the COVID-19 pandemic.”
And since rate changes would appear to be off the table since Fed participants have clearly stated their reluctance to go negative, “many market participants are anxiously awaiting Chairman Powell’s press conference,” said Stifel Chief Economist Lindsey Piegza. “Many hope the Fed chair will offer guidance as to the expected pathway of the recovery for the U.S. economy given the unprecedented nature of the forced shutdown."
Edward Moya, senior market analyst, New York at OANDA, expects the meeting to “shine some light to the plethora of stimulus measures unveiled over the past couple months. The devil is in the details and this meeting will draw scrutiny to the effectiveness and the duration of these policy measures, and whether the Fed can endure a ballooning balance sheet.”
Since no one knows how long the coronavirus pandemic and economic closures to reduce the spread of the virus will last, “the Fed will likely deliver minimal forward guidance on how long rates will stay at near zero levels,” he said. And he doesn’t expect the meeting to offer any “new initiatives.”
And while the markets aren’t expecting much, believing the Fed is concentrating on “ensuring smooth market functioning,” Payden & Rygel Chief Economist Jeffrey Cleveland said, “They are, but they are doing so much more. Buying corporates, municipals, bank loans? That’s ‘fiscal QE.’ New territory.”
Similarly, Marvin Loh, senior global macro strategist at State Street Global Markets, said the Fed will use the meeting “to assess the progress it has made in tamping down market volatility.”
