Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Macro Analysis
Summary: The FOMC meeting confirmed without any surprise that accommodative monetary policy will remain in place for the coming years, with no interest rate hike in sight through 2023 given the current economic uncertainty. The new Fed Fund Dots and economic projections, with a first look at 2023, have been released. What was of interest for investors is that the Federal Reserve has moved closer towards explicitly tying future hikes with three objective-based metrics - in this case maximum employment as defined by the FOMC, inflation at 2% and on track to moderately exceed 2% for some time.
Tonight’s FOMC meeting was uneventful. Without much surprise, the Federal Reserve is committed to keep rates near zero through 2023 until it achieves maximum employment. In addition, QE stimulus will continue to support the flow of credit to the economy, with at least $120bn in monthly purchases. The FOMC statement notes that "over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses”.
There has been mostly three points of interest:
As widely expected, yield curve control was not a major point of discussion. In its latest minutes, the FOMC clearly put this option on the back burner due to risks to lose control over the size of the balance sheet (the Federal Reserve does not want to risk owing, let’s say, all Treasuries with less than 3 years to maturity) and due to uncertainty related to policy exit without causing market disruptions.
What was more surprising is that the Federal Reserve gave little insights regarding its new average inflation targeting scheme unveiled at Jackson Hole last month and how it will concretely work. Investors have been overthinking this but it is clear for the Federal Reserve, given tonight’s lack of information, that it is not the focal point of attention at the moment and that the central bank does not to tie up its hands by being too explicit.
The immediate market reaction to the FOMC meeting has been rather unspectacular. The yield curve has barely moved following the release of the statement – we cannot consider that half a basis point is a significant market reaction. In current market conditions, we expect that the short- and intermediate-term Treasury yields will remain stuck near current levels for some more time. In other market segments, like the junk bond market, investors and traders have apparently welcomed with relief the continued QE support from the Federal Reserve.