Fed holds fire for now

The Federal Reserve did not announce any major policy changes at its April meeting, which was in line with overall expectations. Unsurprisingly, the Fed’s statement acknowledged the dramatic deterioration in the economy since the last meeting. This was corroborated by first quarter GDP data which came in below expectations, at -4.8 per cent quarter on quarter annualised, as consumption and investment collapsed, signifying the start of recession after a record-long expansion. Even though this data only captured the start of the lockdown, it gives us a flavour of what is still to come in the second quarter.

Guidance unchanged

A change to forward guidance on interest rates was one of the main focus points for markets in today's announcement. But the Committee left its guidance unchanged, in line with our expectations, signalling they are comfortable with the policy stance at this point in time. With the economy still in lockdown, it does seem too early for any explicit commitment on the 'lift off', especially in terms of specific thresholds for unemployment and/or inflation. Depending on how recovery progresses after Q2, the Fed is likely to clarify the existing forward guidance at some point later in the year.

In a similar vein, the Fed did not change its guidance on quantitative easing for now. They have been scaling back asset purchases lately, but it also seems too soon for the Fed to commit to a regular pace of purchases at this point. One policy option that does not seem to be on the table for now - according to chair Jerome Powell's recent comments - is the yield curve control. However, we believe it still remains a possibility for later.

The Fed’s messaging makes it clear that while the Committee considers its current policy stance, including the numerous lending programmes, are sufficient for now, they are ready to intervene further if needed.  Given the extreme uncertainty about the outlook which largely depends on the virus trajectory with many moving parts - including any breakthroughs on therapeutic treatments, vaccines, testing and tracing technologies- it is hard to predict if or when the Fed will have to expand the scope of some of its programmes in the future.

But with the recovery likely to be sluggish and patchy, with social distancing measures potentially remaining in place for another 12-18 months, we think there will be a need for further action over the next few weeks - this would include increasing the size of some facilities, changing their terms as well as possibly creating new ones to provide assistance to specific sectors such as housing.