November’s Federal Open Market Committee (FOMC) meeting minutes released overnight showed the Federal Reserve is ready to ease monetary policy further if the US economic outlook deteriorates.
The minutes showed policymakers had a long discussion over the pace and composition of the central bank’s asset purchases. Currently, the Fed is printing money and buying USD80 billion a month of US Treasuries and USD40 billion of mortgage-backed securities.
Though the FOMC chose to keep quantitative easing unchanged in November, the minutes left the door open for the Fed to increase its pace of bond buying in the future as well as to shift the composition of its purchases towards long term US Treasuries - for example to stop 10Y yields rising too quickly over 1.00% if the recovery is still weak.
‘While participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary, they recognized that circumstances could shift to warrant such adjustments. Accordingly, participants saw the ongoing careful consideration of potential next steps for enhancing the Committee’s guidance for its asset purchases as appropriate.’
Financial markets will thus see if the Fed will increase its quantitative easing as early as its next meeting in December. Over the next few weeks, upcoming speeches from FOMC members will be important for stronger signals that the Fed is prepared to raise its bond buying next month.
Source: Bank of Singapore, Bloomberg
This would benefit risk assets while undermining the safe-haven USD. We thus keep our forecast for the EUR to rise to 1.25 over the next one year.
We also remain constructive on the long-term outlook for risk assets as upcoming vaccines support the global recovery and central banks, led by the Fed, stay very dovish.
November’s minutes showed the Fed is set to continue printing money for several years while leaving its benchmark fed funds interest rate unchanged at 0.00-0.25%.
The minutes noted: ‘many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon. Most participants favored moving to qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions.’
Thus, the FOMC appears ready to commit to continue quantitative easing while leaving fed funds near zero until the economic recovery strengthens significantly.
This will include inflation returning to the Fed’s 2% target and remaining there on average over the next few years. But as the chart shows, inflation - as measured by changes in core personal consumption expenditure prices (PCE) - remains well below the Fed’s 2% goal at just 1.4%YoY for October.
We expect core PCE inflation may not recover and average 2% for several years still given the shock from the pandemic in 2020. Thus, the Fed may keep its fed funds interest rate unchanged until as late as 2024 or 2025.Disclaimer applicable to recommendation
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