April 29, 2020 / 6:27 PM / in a month

Fed keeps rates steady, vows to maintain coronavirus measures

NEW YORK (Reuters) - Federal Reserve policymakers on Wednesday left interest rates near zero and repeated a vow to do what it takes to shore up the economy, saying the ongoing coronavirus pandemic will “weigh heavily” on the near-term outlook and poses “considerable risks” for the medium term.

HIGHLIGHTS:

** Powell says in press conference preserving flow of credit essential to setting stage for recovery, fed taking “forceful” action to that end

** Powell says will continue to use tools to ensure when recovery starts it is as robust as possible

** Powell says more likely needs to be done in response to crisis whether by fed or congress

** Powell says policy stance and pace of asset purchases appropriate for now

** Powell says corporate credit facilities are “near” being finalized and will operate soon

** Powell says treasury still has plenty of equity from cares act to expand any facilities if demand is greater than expected

** Powell says if low energy prices pushes headline inflation negative he hopes people “would see through that”

** Fed keeps target interest rate unchanged at 0-0.25 pct, says will stay there until economy has weathered recent events and on track to achieve employment and inflation goals

** Fed says keeps interest on excess reserves rate at 0.10 pct

** Fed says health crisis poses considerable risks to economic outlook over the medium term

** Fed says will continue buying Treasury, agency residential and commercial mortgage-backed securities in amounts needed to support market functioning and effective monetary policy transmission

** Fed says will continue to offer large-scale overnight and term repo operations

** Fed says it is committed to using its full range of tools to support the U.S. economy

MARKET REACTION:

STOCKS: U.S. stocks extend gains after Powell speaks, with the S&P 500 up 3.05% just before the close BONDS: The 10-year U.S. Treasury note yield rose to 0.6206% and the 2-year yield to 0.1994%

FOREX: The dollar index extended a bit lower and was down 0.35%

MICHAEL ANTONELLI, MARKET STRATEGIST AT BAIRD IN MILWAUKEE

“There was no expectation of a rate decision. We’re at the zero bound and we’ll be there for the foreseeable future. What the market really likes from Powell is his suggestion that there’s more the Fed can do both in terms of the size and scope of its tools to aid the economy and markets. This implies that the Fed is not out of ammunition.”

MARVIN LOH, SENIOR GLOBAL MACRO STRATEGIST, STATE STREET GLOBAL MARKETS

“They’re certainly not wanting to upset the Apple cart. They went out of their way to say they’re going to continue to do what they’re doing. They didn’t change anything in the statement in terms of ‘you know what we’ve been doing in the market and we’re going to continue that way.’

“The QE, or the bond-buying, seems interesting in that they phrased it from the perspective of continuing to ensure the functioning of the market as well as the transmition mechanism, so it gives them a little bit of an open mandate to continue to taper as they see fit. But they’re not saying to what amount on concern that might spook the market a little bit.

TOM GARRETSON, SENIOR PORTFOLIO STRATEGIST, FIXED-INCOME STRATEGIES, RBC WEALTH MANAGEMENT, MINNEAPOLIS

    “There are definitely no fireworks. I don’t think expectations were too high. Everyone is expecting some explicit forward guidance, but I think the acknowledgement beyond just the near-term risk of COVID-19 pandemic to the medium term is enough signal to the market that this is going to have a long-lasting impact. And the Fed is not going to even entertain raising interest rates until the unemployment rate is back to at least 4%.”

    “The big question going into the press conference are the Treasury purchases. The pace of the purchases has slowed and maybe there is hope that there is some implementation note about plans going forward: whether they shift to a monthly program, or a plan the beyond the outlook for this week.”

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY

“It’s nothing unexpected. The bigger story for the markets has just been the expectation that things can get back to somewhat normal.”

“The continued support on both monetary and fiscal policy are very important to investors who are obviously looking forward as the current quarter is really quite negative.”

“It’s no surprise in the sense that they have really put themselves in the forefront of trying to lead this recovery back. They have been aggressive and probably are a big reason for some of the strength the market has shown even in light of some really negative economic news.”

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY   “It was interesting that they moved the focus over to their mandate given that the Fed’s actions have been beyond their mandate. They’ve gone into the fiscal arena.”

LUKE TILLEY, CHIEF ECONOMIST, WILMINGTON TRUST, WILMINGTON, DELAWARE”We didn’t expect any kind of rate change or anything on the monetary policy front. Basically the update said, ‘We know the virus is hurting the economy. We expect it to hurt the economy for a long time.’ There’s been a question of whether the Fed would entertain going to negative rates. They addressed this quietly by saying they expect the target rate to stay at 0%-0.25% until the economy has weathered recent events. That says ‘we don’t expect to raise rates,’ but in an environment where people are wondering about negative rates, I read that also as saying they don’t expect to go negative. I expect Chairman Powell to get more questions about that.”

“The FOMC here is not really addressing other Fed programs. You think about the commercial paper and money market facilities – those are all technically programs authorized by the Board of Governors and executed by the Federal Reserve Bank of New York, rather than the committee on monetary policy…What we’re looking for (in the press conference) is an assessment from Chairman Powell on the effectiveness of the lending programs that they’re putting out.”

CANDICE BANGSUND, PORTFOLIO MANAGER, GLOBAL ASSET ALLOCATION, FIERA CAPITAL, MONTREAL

“The FOMC statement naturally errs on the side of dovishness given that there’s still little in the way of visibility with regards to the shape of the eventual recovery.

“Chair Powell has pledged to do ‘whatever it takes’ to ensure that the health and economic crisis doesn’t morph into a full blown financial meltdown. He has reaffirmed that interest rates will stay at zero well beyond the time when the COVID crisis is brought under control. That should ultimately bolster expectations for a strong recovery down the road.”

SHAWN CRUZ, MANAGER OF TRADER STRATEGY, TD AMERITRADE, JERSEY CITY, NEW JERSEY

“It’s more a sell-the-news thing and also if you look into their statement, they were pointing to things like lower inflation, weakening demand but I don’t think that was really enough to reverse the positive trade we’ve had today, But definitely, a little bit of a sell-the-news because you had stocks pull back and Treasury futures moved higher a little bit, that was a function of the Fed saying they are going to continue with asset purchases and they are willing to do so as long as needed, so that might have just given a little bit of a bid to Treasuries.”

JOHN DOYLE, VICE PRESIDENT, DEALING AND TRADING, TEMPUS INC, WASHINGTON

“We think the decision was widely expected and we agree with the sentiment that risks are considerable over the medium term.  Due to the fact the Fed had announced new policies between scheduled meetings, we were not expecting any changes today,”

“I think Powell’s press conference will carry more weight.  We are hoping for forward guidance but we also understand that he might not be able to give clear guidance due to the uncertainty that this virus is still causing.”

GUY LEBAS, CHIEF FIXED INCOME STRATEGIST, JANNEY MONTGOMERY SCOTT, PHILADELPHIA

“There wasn’t a lot in the statement that we didn’t already know.

“The more significant comment is that the FOMC is concerned about the downside risk to the economic outlook over the medium term, suggesting they will remain extraordinarily accommodative in policy for several years to come.

“The fact that they started with a mission statement is somewhat significant. When they stick their necks out and say they will use all their ammo, that’s a significant statement of support. It’s clear from the performance of equity market and other risk assets today that this was the kind of statement that was expected.”

Compiled by Alden Bentley

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