17 Sep FED MEETING LARGELY A NON-EVENT
In my view the FOMC meeting was largely a nonevent. The Fed left interest rates near zero and signaled it would leave them there through at least 2023. The Committee stated “with inflation running persistently below the 2% longer run inflation target, the FOMC will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time.”
The above statement confirms the August 27 remarks it will inflation to overshoot their 2.0% target after periods of underperformance.
The Fed’s quarterly projections showed a slightly more upbeat outlook as compared to June. The central bank is now projecting a 3.7% contraction in 2020 as compared to a June estimate of a 6.5% drop. Growth is expected to rebound to 4.0% in 2021. The fourth quarter unemployment rate is now forecasted to be 7.6% vs 9.3% in June and 5.5% in 2021.
Regarding inflation, the PCE is now projected to rise by 1.2% in 2020 vs a 0.8% June estimate and 1.7% in 2021. Longer run fed funds rate was left unchanged at 2.5%.
Stepping back, I believe the new policy is extraordinary forward-looking guidance. The FOMC disclosed its aim of pushing inflation “moderately above 2% for some time” until the labor market essentially reaches full employment.
Based upon the above Fed projections, the unemployment rate needs to drop below 4.1% and the headline PCE inflation greater than 2.0%. before the Fed acts.
Bloomberg writes the above environment has only occurred 23 months since 1960. So in other words, the Fed is not going to act until the economy is near perfection.
Wow! What I think will be the immediate response is a steeper yield curve, a lower dollar and “volatility” in high PE growth stocks.
If yesterday is a harbinger of days to come, such an outlook is not perhaps prophetic as the NASDAQ declined about 1.25%, small cap value stock rose about 1.5%, the dollar fell and commodities and Treasuries yields rose.
Briefly commenting about yesterday’s economic release, the 0.6% rise in August retail sales was a bit weaker than expected but many are dismissing the data given that sales are already 2% above their pre-pandemic level.
The big picture is that the expiry of the enhanced unemployment benefits at the start of the month did not have the catastrophic impact on spending some were suggesting. The statistics suggest that real consumption remains on course to rebound by close to 40% annualized in the third quarter.
What will happen today?
Last night the foreign markets were down. London was down 0.47%, Paris down 0.76% and Frankfurt down 0.73%. China was down 0.42%, Japan down 0.67% and Hang Sang down 1.56%.
The Dow, led by the technology, should open moderately lower. Housing data and weekly jobless claims are released at 8:30.
Oil is about 1% higher on an influential report from the giant commodity trading firm Trafigura stating the lack of funding in the exploration and production companies leave the world with a “major problem” stating that the world needs to replace millions of barrels daily and supplies may fall considerably more than expected causing an expected rise in prices.
The 10-year is up 9/32 to yield 0.67%.