Given this backdrop, the Fed will leave the Fed funds target rate unchanged at 0-0.25% and we suspect they will refrain from offering muc...

Fed To Leave To Door Open For More Stimulus



Given this backdrop, the Fed will leave the Fed funds target rate unchanged at 0-0.25% and we suspect they will refrain from offering much new forward guidance. Their Mainstream Lending Program is finally coming on stream and that will reinforce the view that Fed action will continue to support the economy in addition to numerous other lending facilities that are already operational.

Their quantitative easing has been tapered significantly with just $4 billion per day of Treasury purchases scheduled for the coming week versus $75bn at the peak. We suspect they will retain the language that they will continue the purchases “in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions”.

In terms of the outlook for policy, the new forecast summary of projections – the first published since December – will provide an insight into how the range of views within the committee is shaping up. We suspect that there is a decent chance they will pencil in one rate rise before the end of 2022, which may help to dispel some talk of the potential for negative rates. Fed officials have been dismissive of this as a tool and we do not expect it to be implemented.

One future option that is gaining traction is yield curve control – using QE to target specific yields to prevent borrowing costs rising too much too quickly. However, given the latest rise in yields is driven more by optimism in the recovery rather than excess supply related to ballooning issuance, the Fed will hold off for now. However, if the initial reopening bounce in activity wanes and the US economy hits one of the many potholes we foresee, this policy option will come up for active Fed discussion.

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