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On the surface, the Federal Reserve didn’t really do anything on Wednesday that wasn’t expected.
The Fed didn’t change interest rates — which was expected as the central bank has for some time said it was reluctant to move into negative territory. The Fed’s dot plot showed the central bank wasn’t planning to lift interest rates through 2022.
Chairman Jerome Powell said the central bank wasn’t even “thinking about thinking about” raising interest rates. The Fed also kept its bond-purchase program unchanged.
Yet the move in market was swift. Stocks DJIA, -3.93% fell after the Powell press conference, and stock futures ES00, -3.21% were sharply lower on Thursday morning.
Vincent Reinhart, a former Fed official and chief economist at Mellon, said there were two surprises. The first was that the Federal Open Market Committee did not move its longer-run assessments of real gross domestic product growth, the unemployment rate, and the equilibrium real fed-funds rate. Powell’s explanation for that was that it was just too soon to evaluate the longer-term impact of COVID-19 on the U.S. economy.
The other surprise, Reinhart said, was the Fed publishing a dot plot at all.
“The dot plot sometimes muddles the FOMC’s message when it draws attention to the outliers in the group who expect substantial and sooner firming than the rest of the pack. The answer is that Powell’s committee holds a remarkable uniformity of views,” he said.
Another expert said the market shift could reflect more what the Fed didn’t do than what it did.
“The Fed would have had to deliver something along the lines of yield curve control in order to outperform market expectations yesterday,” said Jim Leaviss, chief investment officer of public fixed income at U.K. fund manager M&G. “Central banks have been adopting the Spinal Tap model of turning it up to 10 and then 11, getting louder and louder. This feels like the start of some normalization of central bank narrative.”
Krishna Guha, vice chairman of Evercore ISI, made a similar comment.
“The Fed duly delivered an interim fix — dovish SEP [summary of economic projections] dots in lieu of forward guidance, near term QE [quantitative easing] plans in lieu of an open-ended QE commitment. We continue to believe this is second best relative to delivering enhanced guidance and open-ended QE now. But the Fed made it clear going in that this was not on the cards,” he said.
Steven Blitz of TS Lombard drew a bullish message from Powell’s press conference, as he pushed back on concerns over asset price growth that has seen the S&P 500 SPX, -3.29% surge from March lows.
“He is not going to stop adding liquidity to the capital markets based on any internal assessment of equity values as long as unemployment is high, the virus makes the outcome of the recovery uncertain regardless of current economic data and markets are correctly pricing risk. We are admittedly at a loss to understand how he can attest to the market’s risk-pricing ability given the Fed’s heavy thumb on the scale of all market prices, but the FOMC assessment that financial conditions have ‘improved’ is correct,” Blitz said.
