Will the FOMC add more stimulus?
Will the FOMC add more stimulus?
On Wednesday evening the US Federal Reserve’s Federal Open Market Committee (FOMC) will release its July statement. This will detail any changes to monetary policy along with a brief assessment of the US economy. Then Fed Chair Jerome Powell will hold a press conference where financial journalists will grill him over the central bank’s ongoing response to the coronavirus pandemic.
As with the ECB meeting earlier in the month, the Federal Reserve’s July meeting tends to be uneventful as it falls smack-bang in the middle of the summer holiday period. But it could be different this year given the world’s response to the coronavirus pandemic. This time round the Federal Reserve will assess the effectiveness of the tsunami of stimulus, both monetary and fiscal, that has been unleashed so far to counter the economic slump caused by the worldwide Covid-19 lockdown. The next steps from both central bankers and policymakers are crucial in how the world moves on following the devastation experienced earlier this year.
Since its last meeting in June, the Fed has been able to process a fresh raft of economic data as well as a pile of second quarter corporate earnings. These have been a mixed bag so far. But the overall takeaway is that both the data and earnings have proved better than expected, even though the bar was set extraordinarily low. Given this, and as with its efforts after the financial crisis, the US central bank has to walk a line between declaring its constant readiness to step up to intervene further, while reassuring investors that the worst is over. At the same time, Jerome Powell may feel he has to nudge the Trump administration to keep up the fiscal support, particularly as the US experiences fresh spikes in coronavirus cases.
When we look at social media, it appears as if there’s a move to push the Fed into taking further action to stimulate financial markets. Despite the bounce-back in share prices which saw the tech-heavy NASDAQ hit a fresh all-time high last week, some commentators are concerned about recent market movements. The US dollar has fallen sharply this month while the rally in precious metals has seen gold make a new record high above $1,900.
When we delve deeper into our Smart News data store one thing is clear. The talk about a ‘dovish’ Federal Reserve is overwhelming as can be seen in the chart below:
What does this mean? The chart illustrates our ‘Dovish/Hawkish’ index where a positive number is ‘dovish’ and a negative number is ‘hawkish’. Dovishness is a term which indicates the likelihood of the FOMC to cut interest rates and add stimulus. Hawkishness is the opposite, indicating the tendency towards higher rates and less stimulus. The media hype, that is talk of dovishness at the Fed rather than hawkishness, has been overwhelmingly positive for the past twelve months. This means that no matter how much stimulus in the form of bond purchases and rate cuts the Federal Reserve does, the chatter focuses on the need for more. Basically, as far as social media is concerned, the expectation is that the US central bank will continue to cut rates and buy bonds. This is despite rates being close to zero while the Fed’s balance sheet is the largest in the world, at around $7 trillion. Bear in mind that back in 2018 Fed Chair Powell was very anxious to reduce the balance sheet when it stood at a ‘mere’ $4.5 trillion.
The Federal Reserve’s FOMC will be mindful of projecting some positive sentiment to boost confidence and ensure market stability. This is in addition to the practical measures taken, with the Fed expanding its balance sheet for the second successive week after a modest contraction. But there are fears that the current rate of expansion is too slow to keep stocks elevated. While the economic data may have bounced back lifting hopes of a V-shaped recovery, unemployment levels remain far too high to ensure a return to a pre-Covid economy. In addition, when the FOMC last met in early June, the country’s daily count of new coronavirus cases had stabilized. Unfortunately, the recent sharp rise in coronavirus cases is starting to rattle investor confidence again. This goes a long way to explain why social media believes the Federal Reserve must maintain a dovish outlook.
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