FOMC: ‘Looser for longer’ stance unchanged – UOB

Senior Economist Alvin Liew and Rates Strategist Victor Yong reviewed the latest FOMC event.

Key Quotes

“The FOMC will keep its policy rates at 0.0%-0.25% range (0.1%) until at least 2022, according to its updated summary of economic projections. And it will target Treasury purchases at US$80 billion a month and mortgage-backed securities at US$40 billion.”

“The FOMC’s latest economic projections showed the most drastic changes to its near term growth and unemployment projections, to the downside. US GDP is now expected to contract by 6.5% in 2020 while unemployment will end the year at 9.3%. Growth is subsequently expected to rebound by 5.0% in 2021 and extend its above potential growth into 2022 at 3.5% while unemployment will ease to 6.5% in 2021 and further to 5.5% in 2022.”

“Despite the severity of the downturn caused by COVID-19, the Fed’s long run projections for growth (1.8%) and unemployment rate (4.1%) remain similar versus December’s FOMC, suggesting the Fed does not see the pandemic causing permanent damage to the US economy for now although the road to recovery is expected to be beyond 2022.”

“This latest guidance from the Fed reaffirms our view that yields at the front end of the curve will stay low for an extended period. Monetary accommodation will aid in the eventual economic recovery which will be picked up by longer maturity bonds and translate to a steeper yield curve.”