Federal Reserve officials at the regularly scheduled FOMC meeting ending April 29, the meeting minutes for which were released this afternoon, discussed concerns over the damage already inflicted on the American economy by the current crisis as well as threats to the potential economic recovery and financial system in the months ahead. While committing to full measures of support for the US economy, the committee discussed possibilities of additional easing or stimulus while appearing to rule out others.
- Following last month’s FOMC meeting the Federal Reserve held interest rates in place near the 0% bound, having already issues two inter-meeting rate cuts as emergency measures.
- The discussion minutes echoed the somber tone of the post-meeting statement and press conference, which expressed deep concern about the current crisis but pledged the central bank’s commitment to bring its full arsenal to bare in support of the US economy.
- While the FOMC appeared to broadly brush away the chances of negative interest rates in the US economy, the committee did discuss other non-conventional measures as a possibility.
It can be pretty easy to anticipate the look of the discussion minutes that come out of an FOMC meeting that results in no change to key interest rate policies or forward guidance, and this afternoon’s publication of the April 2020 meeting was no exception. As the committee-- from the initial post-meeting statement, to Chairman Powell’s Q&A press conference, through the stream of public “appearances” and commentary from individual Fed officials-- has expressed consistently over recent weeks, the central bank stands ready and willing to use anything that it feels is appropriate to deploy from its toolbox of conventional and non-conventional monetary policy measures.
— CNBC (@CNBC) May 20, 2020
Parts of the discussion between members centered around interest rate policy and other operations and facilities that were either activated in the month of April or that we’ve seen roll out since then. While the Fed has been increasingly active since the start of the crisis and has become consistently vocal about the vital need to for added fiscal support for the economy as well, the meeting minutes suggest that the FOMC generally believes in its ability to implement further monetary stimulus and “easy money” into the financial system. Described in the minutes, the members also discussed how the FOMC could implement foreword guidance—which has been generally absent in recent releases—in the future, indicating that such guidance about when short-term interest rates could begin to move higher could come in the form of date-based or specifically data-based measures.
In discussions about other tools that the Fed could use, many observers and traders were looking for any suggestion that the central bank may be shifting its opinion on the use of negative interest rates as an extreme stimulus tool, given the unprecedented nature of the current crisis. Instead, the committee’s discussions on April 28 and 29 reflect the broad dismissal of negative interest rate policy (NIRP) that we’ve seen from public comments in recent weeks. NIRP received one single mention in the discussion minutes, noting that those surveyed saw “almost not probability” of the Fed taking that step.
There were other non-conventional measures discussed however, the most interesting of which was the idea of capping medium-term interest rates. This is similar to measures that have been used in recent years by the Bank of Japan to effectively take an active role in holding the yield curve within a certain range. It’s most important to remember this was only up for discussion in the meeting minutes, but we’ll keep an eye on any developments moving forward.
Market reaction has been unsurprisingly dull following the FOMC discussion minutes’ release. Gold prices have maintained a steady course just below $1750/oz while the US Treasury 10-year yield has slid once again below 0.7% in a move the preceded this afternoon’s publication. US stocks are broadly up on the day and flat for the afternoon.
Even if it didn’t lead to a remarkable rally in gold prices this afternoon, the narrative that continues through April meeting minutes is generally bullish for gold prices in that it presumes an extremely low interest rate environment for the near- (and well into medium-) term.