BMA Market Insights: Will the Fed Do Another 180°?


Market Snapshot

Rates and equities moving higher in tandem at the open, continuing last Friday’s RISK-ON theme. Optimism over a potential new fiscal stimulus package ahead of the U.S. November elections, successful UK-EU trade talks this week, and COVID-19 vaccine hopes are fueling the rally.  

Mixed Messages From the Fed

While Federal Reserve Chairman Powell reiterated the need for additional fiscal stimulus during congressional testimony last week, other members of the Fed sent mixed messages. 

  • Reiterating Powell’s stance was Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans who offered gloomy views on the economic outlook and said Congress needs to enact more fiscal stimulus or we may see a decline in consumer spending and increased mortgage defaults. 
  • On interest rate projections, Rosengren said the U.S. economy is far from the Fed’s goals of maximum employment or 2% average inflation, and interest rates will stay low for several years. Evans agreed with 2% inflation expectations to be reached by the end of 2023.
  • On the contrary, St. Louis Fed President James Bullard offered a bullish view on the economic recovery and pushed back on such dire forecasts, saying he thought COVID-19 fatality rates were “unlikely to reach the level of March and April” and that “improving treatments and increased vigilance among high-risk individuals should allow the economic recovery to continue.”
  • On interest rate projections, Bullard believes that the 2% inflation target can be reached as early as next year and that interest rates could be lifted before hitting the 2% average inflation target.
  • Echoing Bullard was Richmond Fed President Tom Barkin who said he didn’t think the Fed was too far off from its 2% inflation target.

Weighing heavily on the broader market are:

  • The U.S. November Elections
    • Investors and traders are bracing for a volatile election year as the ultimate Presidential and Senate winners may not be known until December, pushing out typical November hedges into December and January 2021.
  • U.S. fiscal stimulus package
    • It’s been nearly two months since stimulus from the CARES Act lapsed. Over the weekend, Speaker Nancy Pelosi said there’s a chance she and U.S. Treasury Secretary Steven Mnuchin can still reach a deal on a coronavirus stimulus package, and that Democrats will unveil a new “proffer” shortly.
    • We may see long-end rates push higher, on inflation expectations, should Congress agree on a $2 trillion+ fiscal stimulus plan.
  • U.S.-China relations, as both countries fight on everything from trade to defense issues, monetary policy, and the coronavirus. 
  • Second Coronavirus wave
    • While there are numerous potential COVID-19 vaccines and therapeutics currently being developed, the limited production capabilities, timing, and acceptance for people to receive the medical solutions are of concern and could be drawn out to the end of 2021.

Up ahead this week