Yesterday late in the North American session, the FOMC Meeting Minutes release created little or no market volatility. However, the lack of market interest most likely results from the holiday mood in the air, as Americans prepare to celebrate the 4th of July.
Moreover, Canada was on holiday too, with many banks and businesses taking a long vacation. Therefore, with London closed at the time of the minutes’ release, the minutes went unnoticed.
Forward Guidance Still Preferred by the Fed
Despite the lack of interest in the Fed’s minutes, they revealed that the Fed is not leaning towards yield curve control yet, as many market participants believed. The thesis for such a move called for the Fed to follow in Bank of Japan’s footsteps and intervene on the short and long end of the yield curve so as to create ongoing accommodative conditions.
With the federal funds rate already at the lower boundary and ongoing quantitative easing, it looked like the next step for the most important central bank in the world. That is especially true considering that the Fed ruled out the possibility of negative interest rates in the United States.
Perhaps the most important part of yesterday’s minutes, albeit not something new, is that the Fed intends to keep the current accommodative financial conditions for many years to come. This is important for at least a couple of reasons.
First, at the start of the recession created by the coronavirus crisis, many hoped that the economy would have a V-shape recovery – a strong bounce that will allow economies to continue from where they left. In such a case, there is no need to keep an accommodative monetary policy, but the monetary policy should quickly shift back close to where it was prior to the pandemic.
Second, if the Fed’s forward guidance this June indicates that it stands ready to keep the accommodative stance years from now, it tells us that this recession is not going to go away that easy. Even more important – if this is happening in the United States, the largest economy in the world, it is likely to happen everywhere. In other words, we live in a global recession, and the road out of it is bumpy and longer than initially thought.
To sum up, the Fed stands ready to do more should the need arise and is not ready for yield curve control. Yet.