A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The Fed Looks Through the Fog
Share this story:
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.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become
Learn how to keep all your accounts—not just the ones at Fidelity—secure. November 18, 2021 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: November 18, 2021 What to do after a data breach Learn how to keep all your accounts—not just the ones at Fidelity—secure. Read more What's ahead for your RMDs Make sure to take your required withdrawals this year, then start to plan ahead.