FOMC to Highlight Weakness in Economy and Reinforce Dovish Stance in April Meeting

Following unprecedented measures announced in March, we expect the Fed to leave the policies unchanged at the April meeting. The focus will be on the economic assessment and the forward guidance. We expect the members to acknowledge the rapid deterioration in employment, demand, and confidence since the coronavirus outbreak. They will also pledge to add further stimulus when needed.

Since the March meeting was cancelled, so were the updated economic projections and the median dot plots. We will have to wait for June for those updates. Yet, policymakers are expected to sharply downgrade economic assessments due to the coronavirus outbreak. Economic data released since the last emergency rate cut were weak. The flash Markit PMI slumped to 27.4 in April, from 40.9 a month ago. Both manufacturing and services activities deepened into contraction. Existing home same dropped to 5.27M in March, from a downwardly revised 5.76M a month ago. This was weaker than consensus of 5.3M.

On employment, initial jobless claims eased to 4.43M in the week ended April 17. However, the number newly unemployed remained exceptionally high. The market expects a sharp decline in nonfarm payrolls of 20M in April. The unemployment rate might jump to 14%, following a rapid rise to 4.3% in March. The Fed’s long-term unemployment rate target is about 4.5%. We expect the members to note the rapid increase in unemployment and jobless claims. They will project that the unemployment rate should remain elevated in coming months.

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The Fed implemented two emergency rate cuts in March. It lowered the policy rate by -50 bps on March 3, followed by a -100 bps cut on March 15. The Fed funds rate target is now staying at 0-0.25%. Meanwhile, the Fed also reduced the RRR to 0%. On the forward guidance, we expect the Fed to retain the view that the policy rate will be maintained “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”. The reference was mentioned in March 15 statement. We expect the guidance to be maintained as Fed chair Jerome Powell noted on April 9 that, “the principal focus now is not on adjusting what we see is quite an appropriate stance of monetary policy, at least for the next few months”.

On QE, the Fed on March 23 pledged unlimited purchases of Treasuries and mortgage-backed securities (MBS). We expect the members to vote unanimously to leave the measures unchanged at the April meeting. We expect the reference that the Fed “will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions” will be maintained. Speeches from Fed presidents over the past weeks signaled that their biggest concern is market’s perception that the central bank is running out of tools to stimulate the economy in case of further deterioration. We believe the overall tone of the meeting will be dovish, including a guidance that the Fed is ready to take further actions if needed.