Instant View: FOMC - Rates unchanged, cash to keep coming

NEW YORK (Reuters) - The Federal Reserve on Wednesday promised to keep funneling cash into financial markets further into the future to fight the recession, even as policymakers’ outlook for next year improved following initial rollout of a coronavirus vaccine.

Repeating a pledge to keep its benchmark overnight interest rate near zero until an economic recovery is complete, the U.S. central bank said it would also now tie its program of monthly government bond purchases to that same goal.

STORY:

STATEMENT:

MAIN POINTS:

** Federal Reserve maintains key overnight interest in target range of zero to 0.25 percent

**Fed says will continue to buy $80 bln a month in Treasuries and $40 bln a month in agency-backed securities until substantial further progress has been made on maximum employment and price stability goals

** Fed expects to maintain accommodative policy until inflation runs moderately above 2% for some time

** Fed extends temporary U.S. dollar liquidity swaps and temporary repurchase agreement facility for foreign and international monetary authorities through Sept. 30, 2021

** Fed vote in favor of policy was unanimous

** Powell says there is a need for households and businesses to have fiscal support; would welcome work Congress is doing right now; no view on the size of it

** Powell says by end of Q1, Q2 vaccinations will start to have an effect

** Powell says expect second half of next year economy should be stronger

** Powell: my expectation is second half of 2021 economy will be performing strongly

** Powell says have ability to buy more bonds, or buy longer term bonds, and may use it

** Powell says big effects for monetary policy are months and months into the future

** Powell: inflation a faint heartbeat of what it was years ago

MARKET REACTION:

STOCKS: The S&P 500 was 0.37% firmer BONDS: The 10-year U.S. Treasury note yield rose to 0.9213% and the 2-year yield was at 0.119%

FOREX: The dollar index was off 0.25%

COMMENTS:

NANCY DAVIS, PORTFOLIO MANAGER, IVOL ETF, QUADRATIC CAPITAL MANAGEMENT, GREENWICH, CONNECTICUT

“It’s just a waiting game right now. We’re pretty close to getting more fiscal spending. There’s no point in doing anything because the data has been generally better. It’s rational what they’re doing right now.

“The only thing that I thought was important and surprising to me was that five FOMC members forecast a rate hike in 2023 versus four at the prior meeting. That was slightly more hawkish from the FOMC members than the last time. It’s in response to the data. I’m actually pleased to see that because the data has been better.

“They’re saying we’re going to normalize and we’re on the path to higher inflation.”

DANIELLE DIMARTINO BOOTH, CEO AND CHIEF STRATEGIST, QUILL INTELLIGENCE, DALLAS

“The Federal Reserve is in a very awkward position because Congress has failed to pass more fiscal stimulus. The Fed knows it’s the only game in town when it comes to keeping the economy afloat as long as there are still threats of more Covid-related lockdowns. While financial conditions are as loose as ever, it’s an exercise in futility for policymakers to do more when so much has already been done to stimulate the economy, at least on the monetary policy side.”

“The conundrum facing the Federal Reserve is that adding more stimulus, while needed to help the economy, will also stoke the stock market at a time of already record high stock valuations.”

STEVEN RICCHIUTO, U.S. CHIEF ECONOMIST, MIZUHO SECURITIES USA, NEW YORK

“What you’re really sensing here is the fact that they’re more confident in their scenario, than they had been before.

“They feel more comfortable with their outlook and they feel more comfortable that the risks are a lot more balanced around their outlook. It explains why there is no immediacy to do anything that people were looking at, announcing some kind of forward guidance process before they had literally a real good chance to dissect it themselves and come to terms with it themselves.

“They’re worried more about deflation risk than they are about inflation risk, and therefore trying to cap long-term rates makes absolutely no sense, especially when you consider that they were a little bit more concerned in the last FOMC minutes about whether they were unduly over-stimulating the housing market by their MBS purchases.”

MICHAEL SKORDELES, US MACRO STRATEGIST, TRUIST/SUNTRUST ADVISORY SERVICES, ATLANTA“I think they’re not ready to make a move, and I’m not surprised. Some people were parroting that they were going to shift their (Treasury) purchases in 2021 and going to signal that at the December meeting. But when they make those sorts of moves, they’ve been transparent. None of that was happening this time around. In fact, looking at the meeting statement, very little has changed. Looking at the projections, the dots got pushed out.”“It would be premature to start adjusting (Treasury purchases). Let’s get through the winter wave of the virus, which we know will have an impact on all the (economic) numbers.”

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY

“It’s a positive statement. What they’ve done is they’ve married a positive projection for next year with the intention to keep an accommodative and ultra dovish stance until they are certain the economic recovery has taken hold.

“The ultra dovishness is going to lead to inflation climbing higher, and the question is what is the Fed going to do. How is it going to handle inflation climbing?”

ERIK NELSON, MACRO STRATEGIST, WELLS FARGO, NEW YORK

“I think so much of it is about what the Fed didn’t do, specifically extending the maturity of the purchases or the pace of the purchases, and there were obviously some who had expected they would do that. It sends a signal to the market that they are comfortable with some increases in longer-term U.S. yields and I’m not sure markets were fully aware of that. So it’s not surprising to see a bit of a U.S. dollar break here.”

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC (By email)

“The Fed’s statement was largely in-line with what they have done in the past: they will continue to buy $80 billion in Treasuries and $40 billion in mortgage-backed securities, however, they more explicitly tied the continuation of that policy until unemployment is much lower.”

“There isn’t a surprise in the statement other than some people were expecting additional details on whether they would change the allocation, timing or quantity of purchases.”

“Despite the dovish tone from the Fed, the initial reaction from the stock market was for the S&P 500 to move lower. At this point, it seems more likely that stimulus and/or the results of the senate elections in Georgia will move markets more than the Fed statement. However, with the press conference about to begin shortly, it’s still possible for Chairman Powell to have a larger impact on markets.”

COLLIN MARTIN, FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH

“This was a very boring statement. For us, that’s not too much of a surprise because we didn’t really see the need for them to do too more. There has been all this talk about issuing more forward guidance or being explicit about changing their QE to a potential Operation Twist policy, but everything we’re seeing with markets – the stock market is going up, financial conditions are easy, credit spreads are down. The status quo seems fine to us. And we didn’t really see a need for any substantial changes.”

“They could do something down the road (about Weighted Average Maturity.)

“They have plenty of flexibility with their current holdings to embark on an Operation Twist if need be.”

“It look likes once we saw there was no explicit guidance (on WAM) yields jumped 3-4 basis points, but only back to the level where they were this morning.”

GENNADIY GOLDBERG, SENIOR US RATES STRATEGIST, TD SECURITIES, NEW YORK

“The bear steepening move after the Fed makes sense as a portion of the market was expecting a WAM extension. However, the Fed did commit to doing QE until “substantial further progress has been made”, which in a sense was aimed at keeping a dovish tilt to their views. I suspect Powell’s press conference will be more dovish to help balance out the market’s disappointment on the WAM extension; I would suspect Powell will mention potential near-term economic slowing and commit the Fed to doing more if near-term data deteriorated more than expected given rising COVID cases.”

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS

“I don’t think there’s anything in there that changes their accommodative stance ... I don’t see anything at all that’s a surprise that I wouldn’t have expected. The market’s reaction is relatively subdued.”

“The expectations for stimulus are built in so if we don’t get one that would be a much more substantially negative reaction that if we get one which would be very modestly positive.”

MATTHEW MISKIN, CO-CHIEF INVESTMENT STRATEGIST, JOHN HANCOCK INVESTMENT MANAGEMENT, BOSTON

“They didn’t give any additional guidance on the asset purchases, which is the one thing I think that markets were looking for as kind of an additional year-end stimulus measure.”

“They are still going to be exceptionally dovish, I think that Powell is going to reinforce that in the press conference. They are still going to do whatever it takes.”

“I don’t think it’s a huge change, but you could see yields drift up a bit here, you could see a bit of a risk-off tone in markets in the short term. But if Powell manages to not mention anything hawkish out of the press conference…then I think the response should be pretty muted.”

KATHY BOSTJANCIC, CHIEF U.S. FINANCIAL ECONOMIST, OXFORD ECONOMICS, NEW YORK

“We had expected perhaps an extension of the maturities of the asset purchases. They didn’t do that. But this guidance, forward guidance on QE is pretty powerful in the sense they are going to maintain the amount of purchases until they feel they made substantial progress toward the dual mandate. So that gives some clarity, which is good.”

“I wouldn’t be surprised to see a little upward pressure and movement in long-term interest rates.”