Fed Goes “All-In”-er, Promises Low Rates For Longer-er; Extends Swap, Repo Facilities Into 2021

Since the last FOMC statement on June 10th, when Chair Powell pretty-much went “all-in”, gold has exploded higher, the dollar has weakened, and stocks tumbled…

Source: Bloomberg

And the yield curve has flattened dramatically…

Source: Bloomberg

Neither of which are good signs for The Fed’s credibility. Worse still, the market is pricing in negative rates at or before Dec 2021 and basically zero rates for the foreseeable future…

Source: Bloomberg

So, as we noted in the preview, how can Powell “out-dove” a market that is already at historic levels of implied dovishness?

As BofA ominously warns, “perception that the Fed is out of ammo could cause a reassessment of the Fed “put” and support USD via lower risk assets.”

One way that some expect is for the FOMC to describe the main purpose of asset purchases as increasing policy accommodation and supporting the recovery, rather than supporting smooth market functioning. The new purpose would likely imply targeting a somewhat longer average maturity rather than buying roughly evenly across the curve.

Most expect a nothing-burger today, more-of-the-same (with policy actions perhaps in September), with ‘hints’ at actions the most likely.

And largely it was – no change on rates obviously:

• *FED HOLDS BENCHMARK FUNDS RATE IN TARGET RANGE OF ZERO TO 0.25%

• *FED HOLDS IOER AT 0.10%, DISCOUNT RATE AT 0.25%

Things are improving (just as employment data is about to roll over):

• *FED: ACTIVITY, JOBS PICKED UP BUT STILL BELOW EARLIER LEVELS

And will continue with its “all-in” buying scheme:

• *FED REPEATS WILL INCREASE ASSET HOLDINGS `AT THE CURRENT PACE’

• *FED EXTENDS CENTRAL BANK DOLLAR REPO AND SWAP LINES TO MARCH 31

And nothing will change until everything is fixed?

• *FED ON HOLD UNTIL CONFIDENT ECONOMY ON TRACK, VOTE UNANIMOUS

The key quote from the FOMC:

“The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Separately, and also not surprisingly at all, the Fed also said that it would extend emergency measures it launched earlier this year through March 31, 2021 to ensure the global financial system has access to a ready supply of U.S. dollars, including temporary liquidity swap lines and its temporary repurchase agreement facility for foreign and international monetary authorities.

“The extensions of these facilities will help sustain recent improvements in global U.S. dollar funding markets by maintaining these important liquidity backstops,” the Fed said, noting that the extension of temporary swap lines applies to nine foreign central banks previously announced March 19, 2020.

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What was notable is just how little in the statement was changed from last time: as the June Redline below shows, there were virtually no changes, with the only notable addition the sentence “The path of the economy will depend significantly on the course of the virus.” Well duh. The Fed also changed language modestly around the labor market, noting a “pick up in employment”… just as employment pick up reverses lower.