U.S. Fed: continued ultra-easy monetary policy

At the November 4-5 FOMC meeting, the Fed left its Federal funds rate target unchanged at 0-0.25% and stated that it will continue to increase its holdings of Treasury securities and mortgage-backed securities (MBS) at least at the current pace. It also announced steps that will provide more detail in its quarterly Summary of Economic Projections (SEPs).

Minor changes to the Fed’s Policy Statement. The Fed updated its description of economic activity and employment to “continued to recover” from “picked up in recent months” in its prior Policy Statement. The change reflects slower, but continued growth in the economy after the outsized gains between May and July. We expect real GDP growth to moderate to 4.2% q/q annualized in Q4 from 33.1% q/q annualized in Q3.

The Fed noted that earlier declines in oil prices are holding down inflation. PCE inflation, its preferred measure of consumer price inflation, is well below 2% and expected to remain moderate over the next year given the persistent risks from COVID-19. Market-based measures of inflation expectations have fallen from their pre-election levels, reflecting the smaller chance of Democrats controlling the Senate and thus reduced likelihood of significant increases in spending.

Revisions to SEPs. Chair Powell announced in his press conference that the Fed will release all the details of the quarterly (SEPs) immediately following its FOMC meetings rather than waiting until the minutes are published to release the full details. These additional details include Fed members’ assessments of the uncertainties and risks surrounding their forecasts. The Fed will also include new charts that show the evolution of the Committee’s assessments of risks. We welcome these innovations, which are similar to our suggestions on how the Fed should improve its communications. Somewhat disappointingly, the Fed does not include forecasts of its balance sheet in the SEPs; we have recommended that along with projections of the Fed funds rate the FOMC members perceive to be appropriate, consistent with their economic and inflation forecasts, information on its balance sheet should also be included, in light of their importance as a monetary policy tool (The Fed and financial markets: suggestions to improve an unhealthy relationship, May 2, 2019).

Any discussion of the Fed’s purchases of Treasuries and mortgage-backed securities (MBS) at this week’s FOMC meeting will be reflected in the minutes. The minutes to the September 15-16 FOMC meeting revealed that some Fed members thought it would be appropriate to assess and communicate how its LSAPs would best support the achievement of its dual mandate in future meetings. The Fed’s LSAPs have totaled $2.6 trillion since mid-March, accounting for almost all of the $2.8 trillion increase in its balance sheet. Its lending facilities’ asset purchases have been relatively small, with corporate bonds and bond ETFs purchases totaling $13.4 billion and $3.7 billion extended through the Main Street Lending program.

The outlook for monetary policy. The Fed’s policy will remain ultra-easy, with rates anchored at zero and ongoing QE at its recent pace, regardless of political outcomes of the elections. Fed Chair Powell’s term as Chair ends in February 2022. By that time, we project that real GDP will be back to its pre-pandemic level and the Fed will likely be considering the appropriate monetary policy in a normal economy. No doubt, whoever is the Fed Chair will face very interesting challenges.

Mickey Levy, mickey.levy@berenberg-us.com

Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
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