Bridging to '21
Perspectives on the most recent Federal Open Market Committee meeting.Download PDF
- As expected, the Federal Open Market Committee held the federal funds target-rate range at 0.00-0.25%.
- Fed officials made minor language changes to their June statement, noting that economic activity and jobs “have picked up somewhat in recent months” while pledging again to use its full range of tools to support further improvement.
- The Fed extended the expiration date of seven lending facilities to year-end. The committee also extended dollar-liquidity swap and temporary repo operations to March 31, 2021. The swap lines were established during the liquidity crisis earlier in the year to mitigate U.S. dollars funding strains.
Federal Reserve (Fed) officials reaffirmed their stance to support the economy and financial markets, continuing to signal that monetary policy will remain accommodative, perhaps for years to come. Regarding pre-Covid-19 economic levels, “It would take continued support from both monetary and fiscal policy to achieve that,” stated Chair Jerome Powell. Fed officials repeated that the policies set in place are “lending powers and not spending powers” to solvent entities with the expectation of repayment. While Powell said in his June press conference that the economy would likely begin to recover in the second half of 2020, the Fed now appears less certain, as a full return to normal for businesses and consumers may be stalled with the recent rise in Covid-19 cases. Below are the language changes made in the Fed’s statement from June:
Investors had expressed little prior concern regarding a change in the Fed’s monetary policy stance. Second quarter gross domestic product is expected to be the worst in recorded U.S. history, near-term focus will be on second quarter’s earnings and news of the next stimulus package. Investors’ duel focus seemed to take some of the spotlight away from Powell and the Fed’s comments. Investors did have their ear to the ground when it came to the Fed’s prior announcement about extending PMCCF and SMCCF programs until the end of 2020, though without increasing the size of the facilities. The facilities that saw their expiration dates extended include:
- Primary Market Corporate Credit Facility (PMCCF)
- Secondary Market Corporate Credit Facility (SMCCF)
- Primary Dealer Credit Facility
- Money Market Mutual Fund Liquidity Facility
- Term Asset-Backed Securities Loan Facility
- Paycheck Protection Program Liquidity Facility
- The Main Street Lending Program
U.S. Treasury yields moved marginally on the day and have been mostly range bound since March:
Markets reaction was marginal post-Fed announcement as the Dow Jones Industrial Average and S&P 500® indices moved higher by 40 points and 10 points, respectively. Government bond yields were mixed: the 10-year Treasury finished the day one basis point lower with the curve steepening slightly. Powell reaffirmed the committee’s stance to remain supportive until they were confident the economy is recovering. He stated that “the pace of recovery looks like it has slowed” as “recent labor market indicators point to a slowing in job growth, particularly among small businesses” and “consumer surveys look like they may be softening again now.” The Fed’s continued dovish stance should hopefully maintain investor confidence that the Fed will continue to backstop the economy until a meaningful recovery begins.
One basis point is equal to 0.01%.
The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.
The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.
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