Business

Assessment of Fed Meeting—Analysis You Can Use

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Commentary

Members of the Federal Reserve board and presidents of the Feds regional banks collectively let the world know on Sept. 16 that they think overnight interest rates in the United States will stay at a range of zero to 0.25 percent for at least through 2023.

In response, interest rate and bond markets were basically unchanged, digital currencies are up about 3 percent versus the U.S. dollar, gold prices are also up slightly, and the S&P 500 index of large-capitalization stocks initially rallied about 3/4 of a percent in just 40 minutes, only to lose steam and sell off later in the day.

Furthermore, the Fed announced after its last meeting before the November election that it plans to continue buying mortgages from other financial institutions as well as U.S. Treasuries from the open market “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.”

In other words, it wants to keep overall interest rates low (and thus will keep buying Treasury bonds) and also mortgage rates low (and thus will keep buying securities related to U.S. mortgages, or mortgage-backed securities).

This should be seen as providing a major tailwind to the U.S. housing market for the foreseeable future.

Of course, while jets with a tailwind go faster, turbulence can still occur.

Turbulence in the financial sector, in the real economy, or in the housing sector can come in the form of a resurgence in COVID-19 cases causing another wave of shelter-In-place orders, a disruptive geopolitical event, or a surprise in the U.S. elections.

So despite these potential sources of turbulence, investors, savers, home sellers, and potential home buyers all can act knowing that at least the Fed is working to continue the flow of credit to new homebuyers as well as to those seeking to refinance their existing mortgages at these historically low interest rates. This will likely continue to underpin homebuying activity, as well as some level of consumer spending.

Fed Officials Changing Assessments

Epoch Times Photo
Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, December 2019 to September 2020. Data from FederalReserve.org, analyzed by Shaler Economics. (The Epoch Times)

The accompanying table shows the Fed board members and regional presidents changing assessments from before the pandemic (December 2019), during the third month of the pandemic (June 10, 2020), and Sept. 16.

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It shows those officials shifting assessments regarding the change in gross domestic product (GDP), the unemployment rate, their favorite measure of inflation and the interest rate that their institution most directly influences—the rate that banks charge each other for overnight loans to each other, called the fed funds rate because of the central banks actions to manipulate that rate directly.

Perhaps most interesting from the data after their assessment that overnight rates are going to remain steady near zero for at least the next three years is that the Fed officials surveyed now think the U.S. economy (GDP) will shrink by 3.7 percent this year, a rosier outlook than the 6.5 percent contraction projected in June.

Perhaps third most interesting is their new median (midpoint) projections for inflation in 2020-2022: They are now expected to be only slightly higher than the median projection of three months ago and still lower than the projections of six months ago—even as trillions of new dollars are being being pumped into the global economy from the Fed and other global central banks.

Fed officials also today released new median projections for 2023. They collectively expect the economy to grow 2.5 percent in 2023, with unemployment to fall to 4 percent, and inflation finally to rise to 2 percent.

Price Signals Today

We cant survey market participants about why they are buying or selling. But we can observe through price action whether they are buying or selling. If there more buyers than sellers at a given price level, prices will keep going up until the number of buyers and sellers are about equal, or “the market” reaches “equilibrium.”

So, from the price signals we can observe, we can look for clues as to why.

It seems the bond markets werent surprised by todays of announcements. Markets for interest-rate-related instruments are generally all unchanged. The interest rate on the 10-year U.S. Treasury bond was unchanged at about 0.68 percent and the market assessment for forward inflation over the next 10 years remains at about 1.7 percent.

There had been a risk that the market would reassess its long term inflation expectation and that interest rates would have to go up to reflect that changed assessment. However, interest rate markets are unchanged, an indication that bond markets didnt see anything they werent expectRead More – Source