10 key takeaways from the US Fed meet on July 28-29
There was virtual unanimity on the need to hold rates at the current low level of 0.00%-0.25%. Here are some key takeaways from the FOMC meet.
- One statement from Jerome Powell best summed up the gist of the Fed policy, “We are not even thinking about thinking about thinking about raising rates.” Even as the Fed left interest rates near zero on Wednesday, Powell has made it amply clear that rates would continue to remain at rock-bottom in the conceivable future. It was a unanimous decision by all the members to maintain rates at 0.00%-0.25%, the rates set on Mar 15.
- In the post policy news conference, Jerome Powell underlined that the health of the US economy would remain tied to whether the Coronavirus pandemic can be kept in check. He highlighted that the pace of recovery had slowed ever since the cases had started to spike recently.
- In this light, Powell emphasized that the central bank had virtually pledged to keep supporting the US economy as long as the pandemic continued to exert pressure on economic growth and kept millions of workers out of jobs.
- Powell also averred that global liquidity was as important as domestic liquidity. Hence, the Fed would extend dollar liquidity swaps and temporary repo operations all the way to March 2021. Swap lines to keep US dollars flowing to entities, including global central banks, in need of the currency would also continue for the time being.
- Powell pointed to some real concerns on the jobs front. Labour market statistics point to slowdown in job growth; and this was more pronounced among smaller businesses. Powell also pointed out that the recovery in jobs may have a longer tail as people will struggle to get back to work. These job losses were likely to be more pronounced in specific occupations like restaurants, bars and hotels. Since enough jobs were unlikely to be there, Powell has promised adequate fiscal support for these sections.
- If low rates are one side of the story, the other side is infusing adequate liquidity. The Fed is currently purchasing bonds worth $80 billion per month and it has expressed its commitment to maintain its bond purchases and the array of lending and liquidity programs associated with the virus response.
- In his post policy conference, Powell indicated that FOMC targeted to keep rates stable at multi-year lows till the time Fed officials were confident that the economy had weathered recent events and was on track maximum employment and price stability.
- While the Fed Futures market has been pricing the possibility of negative rates (leaving rooms for further rate cuts by the Fed), FOMC did not provide any indications of any likely change in rates. In the last June FOMC meeting, the median Fed estimate for GDP growth was (-6.5%) in 2020, +5% in 2021 and +3.5% in 2022. There has been no change in these projections too.
- The status quo on rates, the assurance of no immediate rate hikes and relentless liquidity infusion is positive for global markets, especially emerging equity markets like India. The low levels of bond yields globally are already making a base case for a shift to equities. With liquidity abundant, there are billions of dollars waiting in the sidelines from ETFs and other passive investors. That means asset inflation would only continue as the more deserving stocks and indices will get a bigger share of inflows. So valuations may appear steep but they may still keep expanding due to liquidity.
- How will the FOMC stance impact RBI policy? Actually, it will impact in two ways as the RBI Monetary Policy Committee prepares to announce its next policy on 04 August. Firstly, the RBI will be more comfortable cutting rates further as the Fed refusal to even consider rate hikes will be conducive to the RBI’s dovish stance. Secondly, even as inflation is elevated in India, low rates and abundant liquidity will ensure that Indian debt paper may once again start attracting FPI buying interest as yield spreads narrow.