Fed sets its sights on recovery

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      By Eric Stein, CFACo-Director of Global Income, Eaton Vance Management

      Boston - At the press conference following the Federal Open Market Committee (FOMC) meeting, US Federal Reserve Chair Powell conveyed a fairly neutral to medium-term dovish position to give markets confidence that the Fed is certainly committed to doing whatever it takes to keep the economy doing as well as it possibly can, despite the economic challenges created by the coronavirus pandemic.

      The Fed said it is in no hurry to move rates up from the 0% to 0.25% range until the "economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."

      In my view, the Fed is moving to a transition phase. From focusing almost exclusively on the core market functioning issues that it was forced to address in the middle of March, the FOMC is likely to announce more open-ended quantitative easing at its next meeting in June, which should help with the medium-term economic picture. While most of the acute market function issues have been at least somewhat resolved, the Fed announced some tweaks to the Municipal Liquidity Facility earlier this week and an expansion of the Main Street Loan Program on Thursday morning. We will likely see more changes to these and other programs if necessary going forward.

      If we see the beginning of a recovery as the economy hopefully starts to begin opening up over the next few months, I think the Fed will try to ensure that it's as strong as possible. Powell said the Fed would continue to act "forcefully, proactively and aggressively" toward achieving a robust recovery. At that point, I expect the Fed will spend more time thinking about what it must do to get inflation expectations up.

      Otherwise, it was a fairly uneventful FOMC meeting, largely because the Fed has already announced an unprecedented amount of economic support. There was an expectation that it would move the interest rate on excess reserves (IOER rate) from 10 to 15 basis points for technical reasons. But that didn't happen, as policymakers likely assumed that any negative signaling from even a technical 5 basis point hike outweighed getting the exact perfect rate from a money market microstructure perspective.

      Bottom line: If markets sell off some more, similar to what occurred in March, I don't believe the Fed will quit its current approach. Conversely, if markets end up being better behaved as they have been recently, and the economy remains as weak as everyone — including the Fed — is expecting, I believe the Fed is going to be very easy with monetary policy for a long time.