Fed meeting: Volatility continues

Federal Open Market Committee Meeting

The Federal Open Market Committee (FOMC) met on Wednesday, September 16, 2020. In his first public address since the Jackson Hole Summit, Chairman Powell emphasized the Committee’s focus on achieving an inflation rate that averages 2 percent over a longer time horizon, as well as achieving the mandate for maximum employment. The Chairman cited weaker demand in response to the COVID-19 pandemic and significantly lower oil prices as the drivers for the currently low consumer price inflation. Given the recent inflation environment, the Committee is targeting an inflation rate moderately above 2 percent for some time to achieve their average goal. This led the Committee to vote to maintain their current level of asset purchases as well as keeping the federal funds rate in a target range of 0 to .25 percent. Chairman Powell expects to maintain this range until both mandates are achieved. The continuation of a low rate environment is evident in the forecasted rates below, where 13 of the 17 Fed officials hold rates at current levels through 2023.

Wednesday was the first preview of the Committee’s 2023 economic projections and as noted in the chart below, inflation is not forecasted to reach the FOMC’s target 2 percent mark, let alone increase beyond that, until 2023. On the employment front, initial jobless claims came in at 860,000, down from 893,000 in the week prior and marked the third week in a row below 1 million. Chairman Powell noted the recent decline in unemployment is expected to continue, with projections of 7.6 percent at the end of 2020 and 4 percent by 2023. The Chairman also noted that the recovery has progressed more quickly than previously expected and thus revised forecasted GDP up since their June Summary of Economic Projections. The revised GDP forecast led to a slight strengthening of the dollar. However, most notably in the foreign currency markets, CNY and JPY continue to strengthen against the dollar as economic outlooks coming out of Asia are comparatively stronger.

(Related insight: Read “Market volatility impacts FX markets”)

Commodities

The Organization of Petroleum Exporting Countries (OPEC) met on Thursday. The Organization had a positive review of the production data for August 2020 and reiterated the importance of member and non-member compliance to production volume. The positive views on the supply front gave oil a boost, with prices rising approximately 2%. This overshadowed the updated demand projections from the International Energy Agency’s (IEA) Oil Market Report, released on Tuesday, which revised its forecasted 2020 fall in global demand for oil versus 2019 to 8.4 million barrels per day (mb/d) from the 8.1 mb/d projection in their previous report. This type of movement is indicative of the higher short-term volatility seen in commodities markets, even when forward looking pricing suggests stability. This is driving many of our corporate clients with commodities exposure to evaluate collars in the current environment.

(Related insight: Read “Market volatility impacts fuel markets”)