A quick note on our expectations for this afternoon’s Federal Open Market Committee April meeting statement and Chairman Jerome Powell’s virtual press conference:
** First, we expect Chairman Powell will almost certainly make clear the Fed’s determination to keep policy as accommodative as necessary and for as long as needed. To ensure there is no doubt in the 30 minutes between the statement and the start to the presser, the FOMC may opt to harden up the guidance language to reaffirm they intend to stay accommodative, by tweaking the phrasing about keeping rates where they are until the economy has “weathered recent events and is back on track” to perhaps something along the lines of a sustainable economic recovery underway.
** Second, the FOMC may also need to update the “at least” figures for its treasury and MBS purchases. After an unprecedented font-loading of bond purchases the Fed has been ratcheting down the pace of its interventions to a current level of around $18 billion a day, but with so much near-term uncertainty over the outlook and market function, it seems unlikely the FOMC will signal bringing the purchases to a complete close. The Committee could scale down the commitment on asset purchases to a lower number, but with little doubt over the Fed’s commitment to ensure market liquidity, the FOMC may opt for maximum flexibility by dropping the reference to specific amounts of asset purchases altogether, with the statement simply affirming they will continue to purchase assets on an “as needed” basis as they monitor market liquidity.
** While Chairman Powell may offer up some flavoring of the FOMC’s current thinking, perhaps even a timeline or guideposts in the transition to the Fed’s monetary policy going forward, we still expect the details to be rolled out at the June meeting, with plenty of speeches and staff papers to telegraph its formal unveiling in a statement. As we wrote last week (see SGH 4/22/20, “Fed: Going into the April Meeting”), we expect the Fed’s policy strategy at the Zero Lower Bound to be built around an aggressive lower for longer forward guidance tethered to real economy thresholds on inflation and employment, reinforced with a muscular commitment to large scale asset purchases. We do not expect it yet to include the adoption of yield curve caps.
** The statement’s opening descriptive paragraph on the economy will probably make for some grim reading, noting the scale and depth of the economic devastation in March and April, the surge in unemployment, the freefall in economic activity and the collapse in oil prices. The Committee will have to acknowledge the drop in inflation and inflation expectations, though they will probably avoid mentioning deflation risk and will frame the inflation narrative in the context of its eventual rise back to mandate-consistent levels. Indeed, they may try to find a credibly way to spin the most positive take possible for at least a decent rebound in the second half of the year, however frail and uneven they expect it to be.
** While there is no need to wait for the statement to do so, the Committee may include a well-deserved reference to their success so far in the QE and the roll-out of the 13-3 facilities in stabilizing most of the capital markets. There is likely to be an affirmation of further modifications and adjustments in the individual facilities, several of which are still to be rolled out, if and when as needed. We are skeptical the FOMC will move towards establishing a new facility to help support the battered energy sector. Like the support for the airlines, we suspect Fed officials will be very wary of “bailing out” specific industry sectors of the economy and Chairman Powell, if asked, will defer those measures as falling more suitably within jurisdiction of Treasury and Congress.