Powell set to speak to Congress

Powell will deliver part 1 of Humphrey Hawkins in the Senate

Powell will deliver part 1 of Humphrey Hawkins in the Senate
The Fed tends to be a punching bag when the economy is in bad shape or when they try something new. If I were a politician, I would certainly be trying to score points on a central bank buying junk bonds and calling a program delivering loans up to $300m as ‘Main Street’ lending.
But I don’t think the market cares. Powell has all the canned answers ready, saying that inflation is low and that the aim is to lower employment.
The criticism of the Fed chair last week was that he was too downcast. Perhaps he will try to correct that but I don’t think it’s warranted. The most-important thing for the market is that he reiterates that the FOMC will “act forcefully, proactively and aggressively.” I don’t see that changing.
One area that is a bit of a minefield is unwinding all the March programs. For instance, the stated goal of the corporate bond buying program is to restore market functioning and it’s set to expire in September. They’ve already achieved the goal — spreads are narrow. Will he start to move the goalposts?
The headlines will be out at the top of the hour and the Q&A will start 20-30 mins later.

The Federal Reserve flags risks and twice–yearly report on financial hazards

Federal Reserve publishes its 2020 financial stability report

  • warns financial sector vulnerabilities likely to be significant in near-term
  • pandemic strains on household and business balance sheets likely created fragility’s that last for some time
  • warns banking sector may experience strains as a result of economic and financial stocks
  • Banks so far have been able to meet demand for credit line drawdowns while adding to loan-loss reserves
  • some hedge funds have been severely affected by large asset price declines and volatility, contributing to market dislocations
  • primary dealers struggled to provide intermediation services at peak stress periods
  • asset prices subject to significant declines if pandemic worsens
  • funding markets were less fragile than in financial crisis but still suffered strains required Fed intervention
  • high levels of business debt likely to make economic fallout from pandemic worse
  • pandemic poses severe risk to businesses of all sizes and millions of households
  • pandemic to cause a sharp rise in defaults on household debt
  • market debt for long dated treasuries and treasury futures in March fell to record low and has shown only modest improvements since
  • mortgage servicers under strain from forbearance could lead to less mortgage credit and some failures in the future
  • further dollar appreciation could put additional strains on US firms that rely on exports and supply chains in their operations
  • Covid 19 risks, a no deal Brexit, still poses risks to European and US financial systems

Federal Reserve Chair Powell will speak this week – to push back on negative interest rates

Fed’s Powell is to speak at a Peterson Institute for International Economics event (webinar)

  • He is billed to discuss his economic outlook, but is also to expected to address monetary policy (more on this below)
  • text with a Q&A to follow
  • Wednesday 13 May at 1300GMT
In brief – while there has been intense speculation about the Fed moving to negative interest rates, it seems likely Powell will push back on this. Other Fed officials who have spoken recently have all expressed caution on moving to negative rates but it may be time to wheel out Powell to more effectively quash the chatter.
Some of the recent remarks on likely negative rates have come from big hitters in the industry, while market pricing has also indicated sub-zero rates.
  • Scott Minerd, global chief investment officer of Guggenheim Partners said on Friday he expects rates below zero ‘soon’ – he cited declining Treasury yields
  • Other market movements are also reflecting expectations –  eg. falling LIBOR,
  • Jeffrey Gundlach, co-founder of DoubleLine Capital tweeted last week on mounting pressure on fed funds to go negative and said “fatal” consequences may have brought the expectations to the fore (more here: Jeffrey Gundlach says pressure building on Fed funds to go negative)
Fed's Powell is to speak at a Peterson Institute for International Economics event (webinar) 

Federal Reserve says rates to stay at bottom until economy on track

Federal Reserve rate decision highlights April 29, 2020

Federal Reserve rate decision highlights April 29, 2020
  • Rates unchanged in a range of 0.00%-0.25%, as expected
  • Fed says rates to stay at lower bound until economy has weathered recent events and on track to achieve unemployment and inflation goals
  • Fed funds rate 2-year projection vs 1.6% prior
  • Fed funds rate 3-year projection vs 1.9% prior
  • Fed funds rate long-term projection vs 2.50% prior
Powell will host a virtual press conference at 1830 GMT. The next scheduled meeting is June 9-10

3 reasons why USD/JPY is heading back down to 105

A note via ING forecasting lower for USD/JPY, to 105 in three months

(1) Japan’s GPIF probably will not pour money into overseas bonds when $/JPY is above 110
(2) the rally to 112 was largely down to USD funding strains, which should reverse into April
(3) Japan’s large current account surplus will see JPY favoured in a recession.
Its a detailed note, but this snippet on point2:
  • Amongst many fire-fighting measures, the Fed and the US Treasury have since re-introduced schemes to support the CP market directly (CPFF & MMLF) and measures to support investment grade corporate issuance (PMCCF and SMCCF)
  • Along with the promise for unlimited QE, the Fed has managed to introduce some calm into money markets
  • We expect even calmer conditions once the Japanese financial year-end has passed (March 31st) and the Fed starts its CPFF program in April. A turn-around in the basis swap should take some upside pressure off USD/JPY. 

Full text: Federal Reserve announces extensive new measures to support the economy

Full text of the Federal Reserve announcement

The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses. These actions include:

  • Support for critical market functioning. The Federal Open Market Committee (FOMC) will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, theFOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
  • Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.
  • Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
  • Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.
  • Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.

The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.

Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. Treasury, using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility. The TALF, PMCCF and SMCCF are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

These actions augment the measures taken by the Federal Reserve over the past week to support the flow of credit to households and businesses. These include:

  • The establishment of the CPFF, the MMLF, and the Primary Dealer Credit Facility;
  • The expansion of central bank liquidity swap lines;
  • Steps to enhance the availability and ease terms for borrowing at the discount window;
  • The elimination of reserve requirements;
  • Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so;
  • Statements encouraging the use of daylight credit at the Federal Reserve.

Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.

The Federal Reserve will continue to use it full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.

Read it here.

Here are all the changes in the FOMC statement (blink and you’ll miss it)

This is how the statement from the Federal Open Market Committee changed in January from December.

Sheesh. Not much. What there is is slightly more dovish (but its a bit of a hair-split isn’t it?)
This is how the statement from the Federal Open Market Committee changed in January from December. 

Fed Powell press conference highlights

Feds Powell conducts press conference after January 2020 interest rate decision

Fed's Powell
  • Fed wants to avoid misinterpretation with inflation wording
  • Not comfortable with inflation persistently under 2%
  • Want to signal not comfortable with prices below goal
  • We expect Bill purchases to make reserves ample in 2nd quarter
  • Fed will know when adjustments have run course when reserves are durably at a sustainable level
  • At some point the Fed will raise minimum bid rate on repos
  • reserve levels will have to be at a level high enough to remain ample. 1.5 trillion will be the bottom end of the range
  • he expects reserve fluctuation particularly around tax season
  • Fed will provide more details and will keep the process a smooth one
  • Fed’s attention is just to raise the level of reserves. That is our sole intention
  • Asked if Bill buying is QE , he says many things affect financial markets.
  • Most forecasts underestimated labor participation gains
  • Labor market continues to perform well
  • Labor wages have moved from about 2% to 3% currently
  • It is a bit surprising that wages haven’t risen more given such low unemployment

Market reaction:

  • Gold has moved to new session highs at $1575.84
  • US rates have moved lower with the 10 year falling to 1.5942%
  • NASDAQ index up 47 points at 9316.69. S&P index up 11.3 points (was up 13 points)
  • EURUSUD moved to New York session highs at 1.1015.  A trendline on the hourly chart is just ahead at 1.1017 and the falling 100 hour moving average is 1.10232
EURUSD looks to test topside trend line and falling 100 hour moving average

  • USDCHF is moving toward session lows.  Markets trading at 0.9728 from 0.9743. USDJPY moves lower as well (109.10 currently from 109.20).
More from Powell presser:
  • virus is a serious issue, significant human suffering
  • coronavirus likely to disrupt activity in China, maybe world
  • very uncertain about how far virus will spread
  • Fed’s carefully monitoring situation around coronavirus
  • sees grounds for cautious optimism on global economy
  • supportive financial conditions, trade tensions easing and lower odds of hard Brexit all contributed to more positive outlook
  • We will continue to adjust IOER as appropriate to help move the effective rate for the middle of the range
  • there is no current urgency to make decision on standing repo facility
  • over the long term it is possible there is a financial stability risk from climate change
  • in the very early stages of the impact from climate change
On China and USMCA
  • Phase 1 deal with China and USMCA is without question positive and should support the economy over time
  • Trade policies uncertainty remains elevated
  • Still have 2 or 3 active trade discussions going on at the moment
  • There is a wait and see attitude for businesses on trade
  • We need to be patient on trade deals economic impact
  • Does not yet see a decisive recovery for manufacturing
There is some modest moves to the downside in stocks and the USD has tilted to the downside (3:04 PM ET):
  • S&P index up 6.5 points
  • NASDAQ index up 32 points
  • The USD has ticked lower through the presser on a modest basis.
More from the Powell press conference:
  • We don’t think there is imminent risk on Chinese debt
  • Fed sees asset value valuations somewhat elevated, but not extreme
  • household that is in a good place
  • business debt is rising but not threatening stability
  • vulnerabilities to financial stability is moderate overall
Press conference ends at 3:23 PM ET.

Trump takes another shot at the Federal Reserve

Trump with the usual stuff

People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting..our manufacturers. We should have lower interest rates than Germany, Japan and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway.
If you’ve been watching CNBC lately, it sure sounds like Jim Cramer is making a real pitch to be the next Fed chair. There was also talk about turfing Powell after the election in a move that would undoubtedly cause a legal fight.

Today is the last chance for the Fed to manage expectations

The Federal Reserve blackout starts tomorrow

The Federal Reserve blackout starts tomorrow
The data calendar is is modest today but there are three Fed speakers on the agenda. The first two are predictable. Kaplan is a dove and we’re head from him already this week when he said he backed the two prior rate cuts but I’m more agnostic on next move. He speaks at 1300 GMT (9 am ET).
Then it’s onto George at 1405 GMT but she’s a reliable hawk so we’re unlikely to get anything market moving.
The big one comes at 1530 GMT (10:30 am ET) when Fed vice chair Clarida speaks in Boston. He’s speaking on the outlook and monetary policy; there will be released text and Q&A.
If the Fed wants to lower the current 81% chance of a cut priced into Fed funds, this is the last chance.
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