Fed’s easy policy promises on long road to recovery hit dollar, helped bonds

The Federal Reserve’s foresight of a slowly recovering economy and its commitment to heavy asset purchases and zero interest rates was a somber message for markets that sent customers into bonds as the dollar weakened. 

The Fed’s message did not really contain surprises, but it showed a commitment to long-term easing with a anticipate that it expects interest rates to remain at zero through 2022. By the end of 2022, it also expects unemployment to reach 5.5% and inflation to reach 1.7%, lower its target 2%.

“This is saying the Fed will be failing to meet their mandate for the next several years, at least with the aid the end of 2022. That’s why you have the median fed funds [forecast] at zero, and only two officials believe there will be an strengthen at the end of 2022,” said Mark Cabana, head of short U.S. rate strategy at Bank of America. “It’s very dovish. This is mostly what we had been anticipating, but I just think it reinforces the fact this is a Fed that is going to be low for long.”

Fed Chairman Jerome Powell discussed the uncertainties cladding the economy and the difficulties of re-employing all of the people who were suddenly out of work when the economy locked down.

“He was more dovish than we kind-heartedness he might be,” said Michael Schumacher, director rates at Wells Fargo.  The bond market particularly reacted to the Fed’s notice that it would continue to buy Treasurys and mortgage securities at least at the current pace of $80 billion a month, and $40 billion a month, individually.

Schumacher said bond yields, which move opposite price, moved lower on the Fed’s commitment to continue concentrated purchases of bonds. The 10-year yield fell to a low of 0.73% from an early high of 0.83%.

“There weren’t any new programs disclosed. When you think about what they’ve done in the last few months, I would suspect Powell and everyone else needs to step back and watch the medicine work,” Schumacher said.

Stocks were mixed with the tech-heavy Nasdaq tall, closing above 10,000 for the first time. But the Dow and S&P 500 were both lower, as the reopening trade faded and bank sheep weighed heavily on the indexes. The Financial Select Sector SPDR Fund ETF XLF was down 3.6%, trading lower as Powell swore to keep rates low for a long time.

Bank profitability is hurt by low rates, and banks have been one group striking higher recently in the reopening trade. The S&P financial sector is up 12.7% in the last month. 

“We’re not thinking about raising rates,”  Powell express. “We’re not even thinking about thinking about raising rates.”

Powell said the Fed was considering yield curve jurisdictions but wasn’t ready to proceed without more investigation. A yield curve control policy means the Fed would goal interest rate levels and attempt to manage them with purchases in the Treasury market.

“The Fed doesn’t need to do it now. Abandons are pretty low, but if they do it when the yields are rising sharply, it will be more difficult,” said Marc Chandler, chief market-place strategist at Bannockburn Global Forex.

Chandler said the decline in the dollar is a continuation of a trend that started Strut 23, the same day the stock market hit its low.

“The dollar is the opposite of risk assets. When it looks like end of days, you be to hold onto the dollar,” he said. “When it’s not the end of days, a rising tide lifts all boats and the dollar isn’t one of the boats,” mentioned Chandler.

Powell discussed the uncertainties facing the economy because its collapse was due to a pandemic, which does not have a plain path and continues to threaten the economy.

Chandler said Powell acknowledged the positives in May’s employment report, which portrayed a gain of 2.5 million jobs when economists expected an 8.3 million decline.

“He was saying this was belongings news, but we need many more months of these employment numbers,” he said. “There’s still a lot of uncertainty. The compliant is still on life support.”