The Federal Reserve’s forecast of a relatively slowly recovering economy and its commitment to large asset purchases and zero interest rates was a bleak message for markets that sent buyers into bonds as the dollar weakened.
The Fed report did not actually contain any surprises, but it showed a commitment to long-term easing, with the forecast that he expects interest rates to remain at zero from 2022. By the end of 2022, he also expects unemployment to reach 5.5% and inflation to reach 1.7%, below the target of 2%.
“This suggests that the Fed will not be able to fulfill its mandate over the next few years, at least until the end of 2022. That’s why your medium-sized funds-in-funds are zero, and only two officials believe the increase will be the end of 2022, ”said Mark Kabana, head of the Bank of America’s short-term betting strategy. “This is very sentimental. This, as a rule, is what we expected, but I just think that this confirms the fact that the Fed will remain at a low level for a long time. “
Fed Chairman Jerome Powell spoke about the uncertainty facing the economy and the difficulties of reusing all the people who were suddenly left without work when the economy was in a difficult position.
“He was bluer than we thought,” said Michael Schumacher, course director at Wells Fargo. The bond market has particularly responded to the Fed’s announcement that it will continue to buy treasury and mortgage-backed securities, at least at the current rate of $ 80 billion per month and $ 40 billion per month, respectively.
Schumacher said bond yields, which are moving at the opposite price, have declined amid the Fed’s commitment to continue major bond purchases. The 10-year yield fell to 0.73% from an early 0.83%.
“No new programs have been announced. When you think about what they have done over the past few months, I suspect Powell and everyone else want to step back and see how the drugs work, ”Schumacher said.
Shares were mixed with the high-tech Nasdaq above, closing above 10,000 for the first time. But the Dow and S & P 500 were lower as resumed trading stopped and banking stocks had a big impact on the indices. The ETF XLF Fund’s financial sector SPDR fell 3.6%, trading lower as Powell promised to keep rates low for a long time.
Bank profitability is declining due to low rates, and recently banks have become one of the groups that has moved higher in the open trade. The financial sector S & P grew last month by 12.7%.
“We are not thinking about raising rates,” Powell said. “We don’t even think about raising rates.”
Powell said the Fed was considering controlling the yield curve, but was not ready to continue without further investigation. The yield curve control policy means that the Fed will focus on interest rate levels and try to manage them through purchases in the treasury market.
“The Fed does not need to do this now. Profitability is quite low, but if they do it when profitability increases sharply, it will be more difficult, ”said Mark Chandler, chief market strategist at Bannockburn Global Forex.
Chandler said the fall in the dollar is a continuation of the trend that began March 23, the same day that the stock market hit its low.
“The dollar is the opposite of risky assets. When it looks like the end of the day, you want to keep the dollar, ”he said. “When it is not the end of the day, the tide raises all the boats, and the dollar is not one of the boats,” Chandler said.
Powell discussed the uncertainties facing the economy because its collapse was caused by a pandemic that does not have a clear path and continues to threaten the economy.
Chandler said Powell acknowledged the positive results in the May employment report, which showed an increase of 2.5 million jobs, when economists had expected a decrease of 8.3 million.
“He said that this is good news, but we need many more months of these indicators of employment,” he said. “There is still a lot of uncertainty. The patient is still on life support. “