PRIMER: Fed Chair Powell to speak on the economy at 0900 ET/1400 BST
WATCH LIVE: The event can be streamed online via the Peterson Institute.
Powell’s remarks are likely to be a reiteration of his post-FOMC comments on 29th April. However, there are a few key themes we will be paying close attention to:
NEGATIVE RATES: Last week, some Federal Funds Futures contracts rose above par, signalling a modest but non-zero probability that the US will see negative rates. Fed officials including Powell have largely pushed back against this notion both recently and historically, stating it would not be an appropriate policy in the US. However, some officials (like dovish voter Kashkari), while not favouring the policy, have not completely ruled it out in the future. And then there is the political pressure from US President Trump, who has previously given mixed signals, this week called negative rates a “gift”. While Powell will likely argue against the policy again, analysts will be watching how aggressively he does so; leaving any optionality to use the policy in the future will likely keep those Fed Funds futures next year pricing some probability of negative rates, albeit moderate for now. In terms of market reaction, negative rates, while assumed to be dollar negative, might not be as negative as first perceived, Credit Suisse says; the bank notes USD-negative repercussions may be limited by the fact that most other major central banks will also be toying with negative rates and QE policies. For equities, when those FF futures began rising above par, it stoked equity upside.
YCC: Analysts believe that the Fed will eventually announce a yield curve control policy to put a lid on shorter-dated yields, and it could be used in combination with a pledge to keep rates low for a long, long time. This would keep rates low for both businesses and consumers during the recovery phase, but also provide favourable conditions for the US government to borrow at low levels to finance relief measures. Many think that the Fed would likely exhaust policies like YCC before resorting to negative rates. While the expectation is that such a policy might be announced at the June FOMC, some suggest it will still be a while before the Fed is ready to implement it. Accordingly, any commentary about timelines will be of use. BMO's analysts have suggested that a YCC policy would help the curve steepen out (short-end yields anchored by the Fed guidance and yield control, while longer-dated yields would rise on large Treasury issuance and the theoretical inflation and growth that recent stimulus fosters).
STIMULUS: The Fed chair is likely to reiterate that both fiscal and monetary authorities will need to do more to ensure that the recovery is robust. His remarks will be interesting given that Democrats in the House unveiled Stimulus v4.0, which Republicans have pushed back against, preferring to see how current measures play out before launching further largesse.
A recap of the April FOMC meeting and press conference can be found here and here.
13 May 2020 - 10:30- Research Sheet- Source: Newsquawk
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