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Fed preview: Will FOMC adopt more cautious stance?

Share Written By
Rahul Gupta

Head of Currency - Research

11 Jun 2020

Key Points

  • Fed fund is expected to maintain a status quo tonight
  • Fed may continue the ultra-easy monetary policy
  • US economy in official designated recession

The COVID-19 outbreak and associated large-scale pandemic-control measures have massively disrupted activity. Both the US government and the Federal Reserve are doing everything they can to aid an economic and market recovery. The Trump administration has provided fiscal support approaching $3 trillion, including over $1 trillion in loans to firms and to state and local governments. Also, Trump is planning to pass more economic stimulus, including a payroll tax cut. While, the Federal Reserve has cut rates to near-zero, and announced far-reaching measures to stabilise the financial system. The latter include unlimited purchases of US government debt and mortgage-backed obligations, as well as large-scale purchases of corporate bonds and of securities issued by lower levels of government. Now the traders wonder what more can the Fed do from here at tonight's meet?

The high-frequency indicators point to an unprecedented collapse, especially for industrial production, retail sales services and travel. The second-quarter (Q2) gross domestic product (GDP) number, is also expected to provide one of the worst quarterly growth figures in US history. However, a surprise improvement in the unemployment data provided some relief. The improvement in jobs data was accompanied by rising demand for goods such as cars and mortgages. The easing lockdown measures have led to this economic upturn, but the situation will be still grim if coronavirus stays. With the possibility of a second wave of infections, we expect the Fed to give a cautious approach when forecasting future growth.

Outlook:

We don't expect the Fed to cut rates as there is a very little appetite for negative rates. Fed Chairman Jerome Powell has repeatedly resisted pressure to slash interest rates below zero, even as central banks in Europe and Japan have gone negative. Powell has also had to push back against calls for negative rates from President Donald Trump. The CME fedwatch has priced in 85% chance that FOMC will keep rates steady at 0%-0.25% while Refinitiv poll shows 92% chance of a status quo. With interest rates unlikely to move, we can expect the accommodative stance to cognitive as we move forward and the central bank to fund or act when necessary. While few market participants speculate that the Fed may implement a yield curve control policy (YCC), where the committee seeks to target specific yields in a bid to avoid a swift rise in borrowing costs. This approach of Powell will weaken the greenback, but if Powell is less pessimistic, pointing out the signs of recovery, then dollar will gain.

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