29 April 2020
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. Indeed, in his press conference Powell alluded to a number of policy options the Committee discussed, which might be appropriate in different economic scenarios.
In the press conference Powell made it abundantly clear that while the Fed considers its current policy stance including the numerous lending programmes appropriate for now, they are ready to intervene further if needed, acting "forcefully, proactively and aggressively".
He suggested that more policy support will likely be needed from the Fed itself and from Treasury to ensure a robust recovery given a number of risks facing the economy after the immediate crisis.
Among those risks, Powell emphasised uncertainty related to the virus itself, the possibility of damage to productive capacity through long-term unemployment and unnecessary business insolvencies, as well as the global downturn that may weigh on US economic performance over time.
On inflation, Powell noted the importance of inflation expectations in determining actual inflation outcomes, suggesting deflation in core is unlikely if negative headline inflation driven by the collapse in oil prices is overlooked. In our view, however, the risk of a deflationary episode beyond the immediate crisis - broader deflation that is not solely driven by oil prices - is not trivial. It remains to be seen if policy support proves powerful enough to avert this dangerous scenario.
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.
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED20 - 145