With several communiques per week, the Fed has been exceptionally active in terms of communication since the last FOMC meeting held on March 15. Its primary preoccupation has been to ensure the continuous flow of credit into the real economy and that financial markets operate normally.
Its primary preoccupation has been to ensure the continuous flow of credit into the real economy and that financial markets operate normally. In a nutshell, the Fed is buying more aggressively than ever, diversifying the composition of purchases and lending dollars in the US and to foreign central banks; all of these measures are undertaken in a virtually unlimited manner.
Since the Fed has acted between meetings in such a bold way, we expect it to take a step back at this formal FOMC meeting which we expect will be less eventful.
However, they could tweak the FOMC statement:
- Forward guidance could be strengthened: the Fed could easily commit to not raising rates until a defined date such as 2021-year end. In the coming quarters, we expect the Fed to embrace Yield Curve Control just as Japan and Australia have done. However, stronger forward guidance would be the logical next step, before opting for Yield Curve Control.
- It will probably comment on the Libor-OIS spread, which has started to tighten from very stressed level thanks to its measures. It could announce some extra measures to help money markets, or at least commit to pumping in more liquidity if the spread does not tighten fast enough.
In the Q&A, Mr. Powell will likely continue to reject the prospect of negative rates. We must admit that according to our experience in Europe, the impact of negative rates on the banking sector has been far from positive!
Disclaimer
This commentary is intended for non - professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.