The Fed keeps the “lower for longer” stance unchanged – UOB

Senior Economist at UOB Group Alvin Liew assesses the latest FOMC meeting.

Key Quotes

“As widely expected, the FOMC voted at its November meeting unanimously to keep its Fed Funds Target Rate unchanged at the range of 0.0-0.25%. The Fed also maintained its recently adopted new strategy of Average Inflation Targeting (AIT) and effectively confirming its stance to keep interest rates low for a prolonged period. It continued to highlight the path of the economy will continue to depend significantly on the course of the coronavirus (COVID-19) outbreak.”

“Powell was cautious in his assessment of the US economy as he noted in recent months pace of improvement in economy has moderated as have the pace of improvement in job market. He repeated the outlook for economy is extraordinarily uncertain and the recent rise in COVID-19 cases is particularly concerning (US recorded more than 100,000 daily infections on 4 Nov while hospitalization rates were also rising) and that he sees getting the virus under control is critical to economy. He also revealed that the Fed plans to make changes to economic projections in December. Powell reiterated the singular Fed message that further fiscal support is likely to be needed. When asked about extending emergency facilities past 31 Dec 2020, Powell said no decision made.”

“In line with the Fed’s adopting of the new strategy of Average Inflation Targeting (AIT) and putting emphasis on "broad and inclusive" employment, the latest FOMC has reaffirmed Fed’s commitment to a prolonged period of low interest rates. We expect the Fed to keep its near zero percent policy rate until at least 2023.”

“Going forward, Powell has given the guidance in this FOMC that the Fed will likely review its economic outlook in the December FOMC. With more clarity in the US Presidential, Senate and House elections outcomes in the coming weeks (hopefully), the possibility of a Biden presidency while Republicans retaining control of the Senate and Democrats holding onto the House of Representative, this will likely translate into a smaller fiscal stimulus package to support the economy which in turn will likely mean the Fed may have to downgrade its growth expectations in 2021. That may also imply more monetary easing from the Fed from its existing tool kits but we continue to hold the view the Fed will not want to push rates beyond zero, into negative territory. Re-visiting yield curve control is a better prospect versus negative rates.”