A cautious Fed
As expected, the Federal Reserve kept its rates unchanged at its policy meeting on 10 June (i.e. the interest rate on banks’ excess reserves stayed at 0.1%) and continued to signal it is in no rush to hike them.
Chairman Jerome Powell insisted that policy will be mainly driven by developments in the labour market, which he sees improving only slowly after the coronavirus shock; the unemployment rate is expected to be a still-high 9.3% in the fourth quarter of this year (compared with 13.3% in May).
Internal Fed consensus is that rates should stay on the floor at least until 2022, according to the policy makers’ median forecast.
Current QE parameters were left unchanged (monthly purchases of USD 120bn/month), but the Fed emphasised this was a minimum level and that it remains flexible.
The Fed continues to study explicit yield curve control. We think it might emerge later this year, especially if the focus shifts from weak growth to the risk of entrenched weak inflation.
We also think that down the line it is highly probable that the monthly pace of QE isboosted from current levels.
The Fed is likely to continue to resist negative rates, preferring yield caps and more QE instead.
Of note, Powell continued to appear ‘market friendly’, not unlike Alan Greenspan in the 1990s.