A dovish FOMC with a hazy forecast for policy

The US Federal Open Market Committee (FOMC) meeting minutes were released Wednesday from its late July meeting. The minutes showed an expression of concern over the US economy and the impacts that the coronavirus was still having several months on from the initial US outbreaks. Stocks and bonds yields moved lower after the digestion of the minutes by traders with the dollar rising ever so slightly.

At the July meeting the FOMC voted in keeping the short-term rates near zero, with voters agreeing that economic activity, employment, and inflation were providing considerable risks to the short-term economic outlook.

Fed leaders made themselves heard that they felt the need for more fiscal policy action would be required. Fed Chairman Jerome Powell has been incredibly vocal about fiscal policy this year, with numerous statements on its need to help foster sustainable growth for the US economic recovery efforts.

In addition to fiscal policy FOMC members discussed the likely hood of implementing yield curve controls, with most voters indicating that they were uncertain on the effectiveness on yields caps in the current environment.  

In the way of forward guidance, the Fed members have not indicated and timelines for policy changes, though the topic of having calendar dates where discussed. At this stage, the FOMC used much of the same language for longer term prospects for the economy, with uncertainty surrounding their decisions they are opting to sit on their hands instead of changing policy much.

The most obvious language change to occur which does provide somewhat more clarity to the Feds thinking is this statement “fostering accommodative financial conditions and supporting economy recovery.” Which is not unlike language we have heard in the past during in periods that quantitative easing strategies have been employed by the central bank. Usually following statements like these targets for inflation and employment are decided, providing a better estimate of forward guidance.

The dovish tones provide by the Fed from the minutes indicates a degree of uncertainty and a necessity for more economic data in the near-medium terms before policy changes will likely occur.

US Dollar (DXY) H1 – Rising off the Fed