Federal Reserve Chairman Jerome Powell speaks during the “The Economic Outlook and Monetary Policy” panel discussion hosted by the Swiss Institute of International Studies at the University of Zurich in Zurich, Switzerland September 6, 2019.
Arnd Wiegmann | Reuters
The Fed is not expected to take any action on its benchmark fed funds rate this week, but it is likely to reassure markets that it is watching the outbreak of the coronavirus and other geopolitical uncertainties.
Fed Chairman Jerome Powell is slated to brief the press after the Fed releases its statement Wednesday afternoon, and it is in those comments investors will likely get the most insight into the Fed’s thinking. The Fed starts its two-day meeting Tuesday.
“They might say something about paying attention to global developments, but I wouldn’t expect them to do anything at this point,” said Ed Keon, chief investment strategist at QMA. Strategists expect the Fed has been watching tensions in the Middle East and now the coronavirus.
“They’re looking at the global economy and it doesn’t look like it will have much affect at the moment,” he said.
It is still unclear how serious the virus will become, or how it will impact the Chinese and other economies. By Monday, the virus had affected 2,900 people and killed 82.
On the policy side, the Fed is expected to hold rates steady and not signal any other moves.
“I think the Fed will be silent,” said Joseph Quinlan, head of CIO market strategy at Merrill and Bank of America Private Bank. “They’ve come into 2020 with their work done. This is a political year. They’ve done their job when it comes to cutting rates. I think they’re in wait-and-see mode.”
The biggest issue for markets is when the Fed will slow and ultimately stop its purchases of Treasury bills, an effort credited by some for a surge in liquidity that has helped boost risk assets, particularly stocks, and tighten credit spreads. The Fed began purchasing $60 billion a month to expand its balance sheet and increases reserves, after problems in the short-term funding market created a temporary snap up in overnight rates.
The Fed has calmed the short-term lending market with the purchases and also ongoing repurchase, or repo, operations. It has said it would continue its operations to help the repo market through the tax season, when there could be higher-than-normal demand for short-term cash. The repo market is basically the plumbing for the financial markets and is where financial institutions go for short term cash.
“It would be nice if they did discuss it, but I don’t know if they’re going to or not,” said John Briggs, head of strategy at NatWest Markets. Briggs said he doesn’t expect Powell to reveal much in the way of specifics on how it will wind down its Treasury bill purchases. He expects the Fed to say in March that it is paring back those purchases from $60 billion to $40 billion, and then will taper them down.
BlackRock’s Rick Rieder said he will be listening for how the Fed describes inflation since it has said it is willing to let it run “hotter” than its 2% target, though the measure it watches has not yet met the target. He, too, is looking for clarification on the Fed’s plans for its T-bill buying program.
He expects the Fed to discuss it by mid-second quarter. “I think they’ll start to taper it down, and I think they’ll be very deliberate and prescriptive about how they’re going to do that,” said Rieder, BlackRock’s global CIO of fixed income.
He said the Fed is adding a lot of liquidity to the financial system on its own, but it is even more massive when combined with the efforts of the People’s Bank of China and the European Central Bank.
“I think they’ll start to taper down the program some time during or toward the middle or the end of the second quarter,” he said. “My sense is they’re beginning the discussions but those discussions will gather momentum in the next month or two.”
Rieder said he expects more Fed officials to become concerned about their policy causing too easy financial conditions, boosting stocks and tightening credit spreads. “My sense is that’s going to be very slow in incubating that idea.”
“The one thing I’ve got my eye on is I think at some point in the next couple of months, assuming what is happening now is a relatively near term risk, I think a lot of the discussion is going to head toward financial conditions,” Rieder said. “You’ve had some of the Fed members talking about financial conditions.”
The Fed is also expected to boost the interest rate on excess reserves by five basis points. That’s a technical tool that it would hope would push its fed funds rate slightly higher. The fed funds rate has been at 1.55%, the low end of its 1.50 to 1.75% range.
“Historically, the Fed has made these adjustments when the funds rate has been trading within 5 basis points of the borders of the target range, as it has recently,” notes JPMorgan chief U.S. economist Michael Feroli. “The markets and the public seem to have understood that these technical adjustments do not represent a change in the stance of monetary policy and we expect that to continue to be the case next week.”