A few things stood out for us in what were otherwise well telegraphed takeaways from the Federal Open Market Committee’s June meeting statement, Summary of Economic Projections, and the remarks to the press by Fed Chairman Jerome Powell:
** The single most important takeaway to us was the signal in both the statement and Chairman Powell comments that the Committee is thinking in terms of September as the most likely meeting they will be unveiling their long awaited new monetary policy playbook. Hopefully by then they will have a better sense of the evolution of the virus – sans a dreaded second wave that is still worrying many Fed officials – the scale of fiscal support, global growth, the extent of the labor market bounce back, and the consumer’s willingness to spend.
** The statement, for instance, noted the current treasury purchases will be maintained at least at the current pace of $4 billion a day or a floor of $80 billion a month, which we took to be a glidepath over “the coming months” to September. Chairman Powell likewise noted the FOMC “will continue our discussions in upcoming meetings.” We will be looking for additional near guideposts to that timeline in the Chairman’s testimony next week and in the meeting Minutes in three weeks.
** When the new monetary policy framework at the Zero Lower Bound is unveiled, we are still reasonably confident it will revolve around an aggressive “lower for longer” – a lot longer — forward rates guidance, framed with thresholds likely to be outcome-based with the low rates maintained until inflation and employment are being brought back to mandate-consistent levels. The Committee, we think, is already near a consensus on the guidance, but we think it is still undecided on how to use the balance sheet to reinforce the rates guidance, whether to extend the current QE or to embrace yield curve caps, or perhaps a hybrid of both.
** Chairman Powell in fact confirmed yield curve caps were discussed at the meeting, but he was carefully non-committal. The staff review of the “historical experience,” for the US, would mean an assessment of the Fed’s caps across the entire yield curve during the financing of the Second World War. We doubt that would be an especially attractive option, and our sense is that if the FOMC opts for YCC, it will be looking to cap at three years to bolster its forward guidance. But in any case, it is far too early for a consensus on whether to turn to yield curve caps at all, much less where on the curve to cap.
** On Summary of Economic Projections, even if they should be taken with a huge grain of salt due to wide confidence bands, the exercise provides a useful benchmark against which to assess future data: the base case is a harsh negative -6% real growth this year, rebounding through year-end and into next year, rising to a median of a positive 5% by the end of 2021. But growth is then projected to slide back down to a median 3.5% in 2022, still well above a declining estimated 1.8% trend growth, and that with the full throttle of massive monetary accommodation.
** The unemployment forecast is equally brutal looking, with a median of 9.3% rate for this year, though perhaps not nearly as bad as feared in the depths of March. It is noteworthy there was no upgrade to the median estimates for longer run unemployment, and Powell affirmed that it was his hope, and less a firm conviction, there won’t be too much hysteresis to the labor force that it rises significantly. With that risk in mind, we would not be surprised to see the NAIRU estimates steadily climbing over time closer to the 4.7% top end of the range projections, or perhaps even higher.
** And underscoring the immense need for accommodation as far as the eye can see, the core PCE projections were just flat out grim, a median of barely 1% this year, never rising even close to the 2% mandate by year three. There is just such a disinflationary weight pressing down on wages and pricing power that in the ranges, more than a handful of the Committee members were resigned to a core PCE as low as 0.7% this year and never rising above 1.2% by the end of 2022.
** No wonder, then, the rate dot plot was the least controversial part of the SEPs: pancaked across all three years, save for just two Committee members penciling in hikes in 2023 — and one even brazenly marking four rate hikes by the end of 2022. Everyone should hope that lone masked ranger is right, but Powell went out of his way to push back, and hard, on a question about upside risk: “We’re not thinking about raising rates or thinking about thinking about raising rates. What we think about is providing support for this economy. We do think it will take some time.”
** Likewise, as we expected, Chairman Powell gently affirmed the Fed wants to see more fiscal largesse from Congress. After praising the “large, forceful, and very quick” $3 trillion of federal fiscal stimulus so far, Powell asked aloud “Is it going to be big enough? That is a question…It’s possible we will need to do more, and it’s possible Congress will need to do more.” The plea for fiscal as well as monetary support underscores our sense of how much the Fed needs a sustained fiscal expansion to drive aggregate demand and inflation expectations higher, as monetary policy alone just won’t get there without collateral costs.
** Those costs in the minds of many both inside and outside is what extent the Fed’s massive “market function” asset purchases are stoking the stellar stock market rise? Powell, however, opted, to punt on the question — “If we were to hold back? We would never do this” — refusing to engage in a debate over any trade-off between “a possible bubble” as the question was put, and the Fed’s flood of liquidity. The Fed, he said is sticking to its twin mandate objectives on employment and inflation, and will just have to set aside, for now, the financial stability calculation, safe in the reassurance of a “banking system so much stronger and better at managing risks.”
** And one last point we thought an important one: in response to a question about the 13-3 facilities, Powell first affirmed the Fed will maintain the lending facilities until they are no longer needed, but then, unprompted, he noted “we don’t have any expertise in managing pools of credit assets, loans, if you will, or bonds. We don’t want to be part of the decisions made to manage such a portfolio.” And signaling an institutional policy ahead, he added that the Fed is already “working on ideas” about handing off the 13-3 lending to a “third party or at the Treasury.”