Federal Reserve - a briefing ahead

Monetary authorities around the world operated in crisis mode in March and it continues to apply. Therefore, the importance of scheduled meetings is diminishing: it works when needed. Therefore, after tomorrow's meeting, we do not expect fireworks or a change in perception of the dollar. In the long run, the Fed's policy will be negative for the USD, only sentiment counts in the short term, and this in recent days is unfavorable for the American currency.

The FED saves the economy as much as possible

Central banks, incl Federal Reserve at the forefront, they did not hesitate to move sharply to save the economy and support liquidity. The spectrum of tools used is very wide. Interest rates were cut, unlimited asset purchases started, repo operations increased, swap lines opened with other central banks, and companies were given access to direct financing against debt instruments.

As a result, the Fed's balance sheet swelled considerably. In October, it was worth less than $ 4 trillion and now exceeds $ 6 trillion. And this is not the end, we should expect the continued dynamic growth of the value of assets, both in nominal terms and in relation to the size of the economy. The Fed acted when necessary and did not wait for the scheduled meeting. Now he does not have to work, because he is busy implementing and coordinating the announced programs. Even more so, there is no need to reach for new instruments. It is not possible to reliably assess the scale of the damage caused by the coronavirus, and the situation has definitely stabilized on the financial markets. The mechanisms of the functioning of the financial system and monetary transmission have been restored. Volatility has decreased, Wall Street indices are at their correction peaks, over 30%. over the bottom of March. Therefore, Wednesday's FOMC meeting will be primarily an opportunity for markets to get more information on how far the Federal Reserve may go and what tools it has at its disposal. The data will be very important: the growth rate of the Fed balance sheet and the shape of its composition.

One of the most controversial instruments is the purchase of corporate bonds (and ETFs related to the credit market) also companies (fallen angels) that have recently lost their investment status and have been degraded. This shows that the loosening limits are now extremely far advanced. Jerome Powell said directly that the Fed will not hesitate and will also reach for other assets if necessary. The market interprets this as an announcement of the future start of the purchase of shares and shares ETFs, but there are also radical opinions that raw materials may be bought (presumably oil). Donald Trump and American producers would certainly enjoy such a solution, but we see it as very unreal. The costs would outweigh the benefits and this would be a dangerous precedent. Certainly, there will also be questions about the possibility of starting the control of the yield curve.

source: Bartosz Sawicki, DM TMS Brokers