Side-by-side: What changed in the FOMC statement
Archives of “June 10, 2020” day
rssFOMC central tendencies and dot plot for projected rates. Fed projects rates to remain at current levels through 2022.
Central tendencies and dot plot for June 2020
The last time the central tendencies and dot plot was released was way back in December 2019. At that time, the world was different place.
At the time in December, the Central tendencies saw 2020 numbers at:
- GDP 2.2%
- unemployment rate 3.5%
- PCE inflation 1.9%
The 2021 projections saw:
- GDP 1.9%
- unemployment 3.6%
- PCE inflation 2.0%
The projection for the Fed funds rate at the end of 2020 was 1.6%. For 2021 the rate rose to at 1.9% with the 2022 rate at 2.1%.
The current median estimate for central tendencies shows 2020 numbers at:
- GDP -6.5%
- unemployment 9.3%
- PCE inflation 0.8%
The projections for the Fed funds rate at the end of 2020 comes in at 0.1%. For 2021 the rate targets 0.1% with the 2022 rate targeted also at 0.1%.
Below is the chart of central tendencies from the Federal Reserve
Below is the dot plot with all participants keeping the rate at 0.1%. In 2022, there are two voting members to forecast day higher rate. The market was looking for the Fed to keep rates low through 2022
The FOMC full statement for the June 2020 meeting
Fed keeps rates unchanged
Below is the full statement for the June 2020 meeting:
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
Federal Reserve to buy Treasuries and MBS ‘at least at the current pace’
Highlights of the June 10, 2020 FOMC interest rate decision
- Will increase holdings of bonds ‘over the coming months’ at least at the current pace to smooth markets
- Buying will continue across curve
- Dots pin rates at zero through 2022 but two dots show lift-off in 2022
- Rates unchanged, as expected
- Repeats pledge to use full range of tools to support US economy
- Repeats that health crisis will weigh heavily on activity and poses considerable risks to the outlook over medium-term
- Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
- Prior statement
- Powell will hold a press conference at the bottom of the hour
The Fed has tapered to $4B/day from a high of $300B/day and there was some expectations they would continue to taper but they are going to keep QE here, which is around $80B per month.
I don’t see anything negative for the market here. The dots are zeroed out and the Fed is going to keep the printer running.
Fed could formalize QE program
What to watch for
Ed Bradford notes that the Fed could offer more-concrete guidance on the pace of Treasury buying.
The only guidance from the Fed so far was Powell saying in May that the balance sheet “couldn’t go to infinity.”
A more-formal move hasn’t been widely hinted at or guided by Fed officials and it hasn’t been a particularly large talking point. But it’s critical.
The Fed rolled out QE in March “in order to support the smooth functioning of the Treasury market.” It’s functioning just fine now so it’s time to move the goalposts and recast the program as some kind of economic benefit.
The current pace of buying is $4 trillion per day, which is about $85B/month. That’s been slowly tapered from an insane $300B per day in the week of March 24-27.
Even the current pace is still double the $40B/day from QE3.
It’s tough to say what the market would be happy with but below the $85B current pace would be fine if the timeline was long enough, or tied to guidance like “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The current statement also offers this guideline:
“To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”
The market wants warm-and-fuzzy feelings from the Fed today
There’s a fine line between:
The economy is doing better (full stop)
and
The economy is doing a bit better but it’s early
The small different between those two statements could dictate the market’s reaction to the FOMC decision and press conference.
This market wants to be reassured that the Fed put is on, that they will do everything possible to keep the economy humming.
The Bank of Japan owns almost 80% of all ETF assets in the country.
FAAANM benefits have sustained the S&P 500 for the past several years.
The top five stocks in the S&P 500 account for more than 20% of the index capitalization.
The emotions in markets are off-the-charts
Do you feel it?
Fear is the strongest emotion but greed isn’t far behind.
What we’re seeing in the markets and in the world right now is extreme emotion. Collectively, I believe that COVID-19 has left everyone an emotional wreck.
We all agree that the fears from the virus have diminished but what has replaced that is a mess. It’s all anecdotal but I’ve come to believe the series of events around the coronavirus has elevated individual and collective emotions — like every day is a full moon.
The fear around the virus has left some kind vacuum and people are trying to fill it.
You see it in people’s lives, in protests, in anger but you’re also seeing it in markets. There has never been a market like this. People are throwing away their hard-earned savings on idiotic gambles on bankrupt companies.
But it’s not just the stupidest of the stupid. The uncertainty in the world is extreme and there’s no reflection of that in risk assets. The transition from fear to greed to euphoria is nonsense.