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November 2020 Federal Open Market Committee Statement Interpretation

Posted: Wednesday, November 11th, 2020

Estimated Reading Time: 2 minutes

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Scheduled one day after the U.S. Presidential Elections, the Federal Open Market Committee statement went without notice. Because market participants focused on something else, the Fed decided to do nothing.

Moreover, at the press conference that follows the Federal Open Market Committee introductory statement, Fed’s Chair, Jerome Powell, avoided tough questions. He reiterated the Fed’s stance and emphasized its lending powers.

However, the Fed did not act on purpose. With one more meeting ahead, and the presidential race ongoing, the Fed did not want to create unnecessary volatility. All these will disappear as the market prepares for more action in December.

Federal Open Market Committee

What to Expect from the December Federal Open Market Committee?

The Fed, therefore, had its hands tight in October. However, it does not mean it will not act in December. In fact, other central banks in the developed world already did (e.g., Reserve Bank of Australia, Bank of England). Some other pre-committed to act in December (e.g., ECB). It looks like a concerted central bank easing hitting financial markets at the end of the year.

More QE from the Fed Next?

The first central bank to ease in November was the Reserve Bank of Australia. On top of the fresh new cut in the cash rate, it also expanded the quantitative easing program.

Next, the Bank of England eased too. While it did not move (yet) the main interest rate below zero, it did increase the quantitative easing program. Moreover, it exceeded markets’ expectations by expanding the program by GBP150 billion instead of GBP100 billion expected.

The Bank of England long-mentioned that it studies negative rates. Hence, we may expect something along the lines should the recessionary conditions persist. However, the Fed completely rules out negative levels on the federal funds rate. Because of that and coupled with what other central banks did in November, it means that the Fed will expand the quantitative easing program at the next Federal Open Market Committee meeting.

Lagarde Hints at More QE from the ECB

The ECB Forum on Central Banking started today. Tomorrow’s policy panel involving Lagarde, Powell, and Bailey is the most important event for investors.

However, in her introductory speech today, Lagarde hinted at more quantitative easing from the ECB. Moreover, she ruled out lowering the deposit facility rate further into negative territory.

Therefore, yet another central bank sees quantitative easing as the de-facto tool to further help the economy. It only makes sense to assume the Fed will favor easing via the same tool at the next Federal Open Market Committee in December.

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