June 10, 2020 / 6:31 PM / 2 months ago

Instant View: Fed sees GDP falling 6.5% in 2020, keeps rates at zero

NEW YORK (Reuters) - The U.S. Federal Reserve on Wednesday signaled years of extraordinary support for an economy facing a torturous slog back from the coronavirus pandemic, with policymakers projecting a 6.5% decline in gross domestic product this year and a 9.3% unemployment rate at year’s end.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

In the first economic projections of the pandemic era, U.S. central bank policymakers put into numbers what has been an emerging narrative: that the measures put in place to battle a health crisis will echo through the economy for years to come rather than be quickly reversed as commerce reopens.

MARKET REACTION:

STOCKS: U.S. stocks turned higher with the S&P 500 .SPX last 0.21% firmer BONDS: The 10-year U.S. Treasury note yield US10YT=RR was down slightly from before the statement at 0.7592% and the 2-year yield US2YT=RR was off at 0.1826%.

FOREX: The dollar index .DXY slipped further and was down 0.715%

COMMENTS:

MICHAEL SKORDELES, U.S. MACRO STRATEGIST, TRUIST/SUNTRUST ADVISORY SERVICES, ATLANTA

“They’re essentially saying, with the (rate) projections, that we’re going to hold steady until 2022. When you look at the next page...back to the infamous ‘dot plot,’ it’s only two that are showing any kind of increase in 2022. So even then, (zero rates are) likely to last three-plus years.”

“One thing that came from last Friday that we heard fairly universally...is a little of this notion of ‘oh, now we’re through with it. We added 2.5 million jobs in May, and there’s not going to be any more fiscal aid.’ And there was some murmur that with the Fed in the near future - in the next six months to a year - ‘Oh, they’re going to pull back. They won’t need to be at zero for that long.’”

“No. The economy is not going to fully repair that quickly. There’s a need for other pieces to be done....From a stock perspective, they’re not pulling away the punch bowl or removing support.”

JON HILL, INTEREST RATE STRATEGIST, BMO CAPITAL MARKETS, NEW YORK

“The kneejerk reaction is going to be very hard to dissect because generally the Fed’s signals were in line with expectations. They acknowledged that unemployment’s going to be high, inflation is going to be low and they are going to keep interest rates very low for at least the next two years. That should be positive for stocks. And they also stopped tapering their quantitative easing program.”

“Two-year yields have fallen. I think that’s both the Fed confirming that they’ll be in the market for the quantitative easing program, but also its that they didn’t pivot out on their QE program... If there was a risk that the Fed would evolve the purchases to be further out the curve, and that risk didn’t happen, that should be a little bit positive for the front end.”

BRUCE MONRAD, CHAIRMAN AND PORTFOLIO MANAGER, NORTHEAST INVESTORS TRUST, BOSTON

“As expected, with regard to rates and the like. Did they do yield curve control – they didn’t. We were struggling with whether they would go there or not in terms of tool chest. Obviously they retain the option to go there but maybe part of it is they are figuring out the full implications of it. And maybe part of this is that normally they are in the business of predicting economics and they do a lot of that, but part of yield curve control and part of forward guidance is forward and the pandemic part so do they really want to tether themselves to the mast as mush it might imply with yield curve control. But more is better than less in their view.”

“What they didn’t do was move the neutral rate in the long term off. Part of their messaging is we are keeping rates low, but this is going to work, it is going to get us there. Whether it is a placebo or not is a different matter, But they did choose to say the neutral real rate will be kind of higher, which is to say, take the painkiller and it will work.”

MARC CHANDLER, CHIEF MARKET STRATEGIST, BANNOCKBURN FOREX, NEW YORK

“This is consistent with what the market pretty much expected that the Fed wouldn’t do anything. Even people like me who think that they would do yield curve control won’t do it anytime soon, maybe at the end of the summer. The growth forecasts are also close to a V-shaped recovery as you can get. The dollar sort of wobbled after the Fed statement, but it’s still headed lower.”

PRIYA MISRA, HEAD OF GLOBAL RATES STRATEGY, TD SECURITIES, NEW YORK

“It’s largely in line with what we were thinking. We thought it was too early to give specific forward guidance. There’s nothing particular on forward guidance. On QE, they’ve kept the pace unchanged. It’s still very flexible. They’re retained a lot of flexibility on rates, as well as the amount they’re buying. I don’t see much market reaction. I think some were looking for Yield Curve Control, and it wasn’t there. It’s too early, it’s a new tool and there’s too much uncertainty around it. We do think they’ll do it by the end of the year.”

CHARLIE RIPLEY, SENIOR MARKET STRATEGIST, ALLIANZ INVESTMENT MANAGEMENT, MINNEAPOLIS

“Heading into this meeting we didn’t expect any policy changes. The Fed is committed to keeping current easing measures in place and it acknowledged that risks remain.”

“For the most part, the Fed took the stance that we’re at the beginning stages of this recovery and it would be premature to change policy under current circumstances.”

Compiled by Alden Bentley

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