Key Points from the June Fed Meeting. Decisive “no” to NIRP

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Let’s start from the brief recap of the Fed meeting:

  • Key rates remain unchanged, monthly purchases of Treasuries and MBS (i.e. QE) will be carried out “at least at the current pace”;
  • Federal funds rate will be kept in the range of 0-0.25% for an extended period of time, until the Fed “is confident that the economy has weathered recent events and on the growth path to the target inflation and unemployment rate”;
  • According to the median forecast, the interest rate will remain at its current level at least until the end of 2022. Only 2 out of 17 committee members expect a rate hike in 2022;
  • None of the officials considers negative rates (there are solid reasons for that).

After the NFP report in May, which shook positions of even the most convinced doomsayers, it was really difficult to eradicate the hunch that the trajectory of US recovery will take the form of V. The Fed yesterday put an end to those suspicions, which become a formal signal for sell-off today.

In my opinion, there are still not enough arguments for the return of the bear market in risk assets. From the standpoint of monetary stimulus, the situation for risky assets not only remained favorable, but even slightly changed for the better (the Fed is clearly ready to do more). The volume of QE purchases will remain at least at the current level (~ $ 20 billion per week), while the expected period of zero rates has increased significantly (and in probability too) thanks to pretty dovish expectations of the committee members. Below is the updated dot plot:

Blue dots indicate the opinions of FOMC members about what interest rate should be in the next two years.

Committee members unanimously agreed that the interest rate should remain at 0 in 2020 and 2021, and only two out of 17 participants thought that it could be raised in 2022. In fact, this is an extremely bearish bias in the policy. But there is little room to expect negative interest rates, as the experiment of Europe and Japan clearly showed how they “bury” the country’s banking sector:

The dynamics of the Covid-19 pace of infections remains generally stable, despite alarming developments in the US states that are gradually lifting restrictions.

Economic growth in the fourth quarter of 2020 was revised to -6.5% YoY, unemployment was revised up to 9% in 2020 which is a worrying sign that may result in some risk-off, especially in procyclical equities in the near term, as the Fed basically delayed expectations of an economic rebound.

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