- FOMC today could announce adjustments of its QE program
- Democratic leaders see heavy pressure to accept smaller $748 billion pandemic aid package
- U.S. retail sales expected to fade
FOMC today could announce adjustments of its QE program — The FOMC at its 2-day meeting that begins today is unanimously expected to leave its main policy variables unchanged, with the funds rate target range at 0.00%/0.25% and the QE program at $120 billion per month.
The FOMC today will release an updated set of macroeconomic forecasts and a new Fed-dot forecast for the funds rate. The last Fed-dot forecast, released at the September 16 meeting, indicated a median forecast for the funds rate to remain unchanged at its current level of 0.00%/0.25% at least through the end of 2023. However, of the 17 FOMC members, one member expected a rate hike in 2022, and four members expected a rate hike in 2023.
The federal funds futures curve is flat as far out as it trades, i.e., late 2022, indicating expectations for no rate hike at least through late 2022. The Eurodollar futures curve, which trades much farther out into the future, indicates that the market is not expecting the first rate hike until mid-2023. The market is then expecting a fairly steady rise of about one 25 bp rate hike per year, leading to an overall +150 bp rate hike by 2029.
While the Fed is expected to leave its funds rate unchanged for the next several years, the Fed has some flexibility to work with its QE program. The Fed, as soon as today, might announce some guidance parameters for its QE program, tying the eventual end of the program to macroeconomic targets, such as the unemployment rate and inflation. The Fed would not be taking a hawkish stance, but would simply be trying to reassure the bond market that is does not plan to grow its balance sheet indefinitely, which could lead to a massive inflation outbreak at some point.
A Bloomberg survey found that about half of the analysts surveyed expect the Fed today to announce its new QE guidance, with most of the rest expecting that guidance to be delayed until its next meetings in January or March.
The market is not expecting the FOMC today to change the size of its $120 billion per month QE program, which consists of buying $80 billion of Treasury securities per month and $40 billion of mortgage-backed securities per month. However, there is talk that the FOMC might shift some of its Treasury purchases to the longer end of the yield in an effort to curb longer-term yields. A Bloomberg survey found that 23% of respondents surveyed expect that move today, while two-thirds of the respondents are expecting that yield-curve shift by the end of 2021.
The FOMC does not have to be overly worried about rising yields right now because of the renewed economic damage being done in the U.S. and Europe by the pandemic surge. That means a decision on a yield curve shift in QE buying might be premature at present.
Nevertheless, there could be some disappointment today, and a rise in longer-term Treasury yields, if the Fed doesn’t shift some of its QE buying to the longer-end of the yield curve because that possibility has been so widely discussed in recent weeks.
The 10-year T-note yield reached a 9-month high of 0.98% on December 4, but ran into resistance at the psychological 1.00% level and has since fallen back to 0.90%. There has been market talk about whether the 10-year T-note yield could see a fairly big upward move if it pierces the 1.00% level and the Fed makes no move to stop it. However, a sustained upward move in T-note yields does not seem likely until the pandemic statistics start to show a permanent drop due to widely available vaccines.
Democratic leaders see heavy pressure to accept smaller $748 billion pandemic aid package — House Speaker Pelosi is seeing heavy pressure to allow the passage of the $748 billion pandemic aid bill, leaving consideration of the $160 billion bill with the Covid liability shield and the state-local government aid until early 2021.
The $748 billion pandemic aid bill could easily pass Congress because it contains the key aid items such unemployment benefits, another round of PPP aid for small businesses, money for pandemic testing and tracing, and aid for a range of other measures. There is still a chance that the Covid liability shield and the state-local government aid could be added to the overall package, but Senate Majority Leader McConnell has rejected all the liability shield compromises put forward so far.
Congress has until only Friday to get the combined omnibus spending bill and pandemic aid package passed since the 7-day continuing resolution expires Friday. The House could start voting on the omnibus spending bill as soon as today. There is a chance that Congress may need to stay in Washington through the weekend or even into early next week, considering that time is so tight.
U.S. retail sales expected to fade — The market consensus is for today’s Nov retail sales report to be weak at -0.3% and +0.1% ex-autos, down from October’s report of +0.3% m/m and +0.2% m/m ex-autos. Retail sales surged in May-August on a rebound from the spring pandemic shutdowns.
However, retail sales started to fade in October due to the surge in the pandemic, which has produced new restrictions on businesses and has also caused people to stay home and voluntarily quarantine. The surge in the pandemic is also causing renewed concern about job stability, leading some people to cut back on their spending until the pandemic outlook improves.
