EDITOR NOTE: Jerome Powell’s announcement on Thursday brought much of the same, most of which was expected, and virtually no action taken in terms of monetary action. Status quo, at least for now. Election results indicate the likelihood of a much smaller fiscal stimulus than most had hoped. This adds pressure to the Fed to be more accommodative on the monetary side. The Fed highlighted that the “path of the economy will depend significantly on the course of the virus.” This we all know. The Fed also warned of significant downside risks should fiscal stimulus be administered in too small a dose, or too late a treatment. Today’s unemployment report came in worse than expected; the same thing can be said for the rise in coronavirus cases. Something is about to give. Meanwhile, the path to recovery remains all too clear: it’s darkening.
The Federal Reserve on Thursday kept its monetary policy status quo, despite slowing job growth, surging coronavirus cases and election results that may keep a lid on fiscal stimulus. After the Fed meeting policy statement and Fed chief Jerome Powell, the Dow Jones held strong gains fueled by relief over election results.
Federal Reserve Press Conference
Fed chief Jerome Powell said in his press conference after the Federal Reserve meeting that policymakers decided against adjusting its asset-purchase program, but will keep the option open.
"Right now, we think that this very large effective program is delivering the right amount of support," Powell said.
Fed chief Powell cautioned that the economic outlook is "highly uncertain," noting risk associated with the broad acceleration of coronavirus infections.
Dow Jones, Treasury Yield Reaction To Fed
The Dow Jones Industrial Average, S&P 500 index and especially the Nasdaq composite have rallied strongly on the election results. That suggests Wall Street likes the prospect of divided government, which would blunt Democratic legislative goals, if Joe Biden prevails.
The Dow Jones, after rallying rallied 1.3% in Wednesday's stock market trading, tacked on another 1.95% after Thursday's Fed meeting statement and Fed chief Powell's press conference. The S&P 500 also climbed 1.95% and the Nasdaq composite jumped 2.6%.
The 10-year Treasury yield has pulled back to 0.78% following the election results, but was little changed on Thursday.
Federal Reserve Keeps Wall Street Guessing
Some on Wall Street figured that this week's election results might be the final straw that pushed Fed policymakers to amplify their monetary policy stimulus. Since the Fed last met in mid-September, job gains have slowed and coronavirus cases have surged. Now, the high likelihood of divided government suggests only a "skinny" fiscal stimulus will be coming.
In a Wednesday note titled 'Election Implications: Skinny Stimulus, Fatter Fed,' Jefferies economists Aneta Markowska and Thomas Simons wrote that "with fiscal policy being less generous than assumed, there's pressure on the Fed to do more. "
Currently, the Fed buys about $80 billion worth of Treasuries and $40 billion in government-backed mortgage securities per month.
Jefferies economists figured that the Fed might opt to focus more of its Treasury purchases on longer-maturity bonds, such as 10-year Treasuries. The 10-year Treasury yield is a key factor underlying mortgage rates, auto loans, student loans and credit-card debt. So Federal Reserve action to push down this rate should help stimulate economic activity.
The Fed continued to highlight in its policy statement that " the path of the economy will depend significantly on the course of the virus."
Fed Warns Of 'Significant Downside'
"If the Fed fails to respond quickly to the buildup of downside risks, inflation expectations will move further down," Markowska and Simons wrote.
They saw "a decent chance that the Fed responds this week by extending the maturity of its Treasury purchases."
Under unified Democratic control, Congress may have approved a $3-trillion fiscal stimulus package. But a GOP-controlled Senate might approve a skinny package worth about $500 billion, the Jefferies economists say.
There's still a possibility Democrats will gain razor-thin control of the Senate, if Joe Biden prevails and Georgia elects two Democrats in a Jan. 5 runoff election.
"The most significant downside risk to my outlook would be the failure of additional fiscal support to materialize," Fed Gov. Lael Brainard said in an Oct. 21 speech. That might allow "recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity."
Originally posted on Investors.com