Morning Commentary: The Fed Looks Through the Fog

Foreign Exchange - Morning Commentary
The Fed Looks Through the Fog
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David Atkinson
David Atkinson
Foreign Exchange Sales Manager
All eyes are on the US Federal Reserve today, which announces a slew of information that markets will eagerly parse and debate.  Arguably the most important announcement, the Fed Funds target is a foregone conclusion to remain in the zero to 0.25% range.  Once that is out of the, way the real fun begins.

The Fed will release its new forecasts for the economy along with the old dot plots.  It’s been a while since w’ve seen these updated.  The Fed was scheduled to do this in March, but clearly the U.S. economy and really the whole global economic system was just going into turmoil.  Now that the economic devastation has become clearer, markets want to know what the Fed expects going forward. 

For comparison, the ECB last week forecast Eurozone GDP to be -0.87% in 2020, +5.2% in 2021, and +3.3% in 2022.  Today, the OECD released two sets of forecasts for the first time in its history.  As you can imagine, it’s “bad” or it’s “really bad.”  The hopeful forecast is for a 6% drop in global economic activity this year, but if there is a second wave of the virus, the OECD expects a drop of 7.6%. 

Going back to the Fed,  the  arsenal of monetary policy and credit programs will certainly remain in place, but at a minimum, markets want to know how the Fed is starting to think about how long these programs will last.  Yeah, we know it is all very uncertain, but the Fed does need to give some forward guidance on this topic. 

Then there are questions about certain extraordinary measures.  We may hear the questions come up again about negative interest rates.  The Fed seems to have made it clear that this is not an option on the table.  One reason why that is not discussed a lot is the horrific logistics of how that would work in the US banking structure.  A lot of US banking software venders never anticipated such a situation, and systems are not ready to handle negative rates – a la Y2K for those old enough to remember that.

What certainly will be asked is what some see as the next alternative – Yield Curve Control.  This is when the Fed picks a particular maturity of the Treasury curve to manage to a low level. The Bank of Japan does this with their 10-year government bond and the Reserve Bank of Australia does this with their 3-year.

The US dollar is weaker going into the Fed meeting today, somewhat unusually so for this event.  It does seem like there is a large part of the market looking to get out of the way ahead of this announcement. 
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