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Fed set to keep interest rates near zero until at least 2023


In its policy statement, the Fed also began to pivot from stabilising financial markets to stimulating the economy: the Fed said it would keep its current government bond-buying at least at the current pace of $US120 billion ($164 billion) per month, but described the goal as in part to ensure “accommodative” financial conditions in the future.

US stocks added to earlier gains after the release of the Fed statement, but slid lower as Powell spoke. In late trade, the Dow Jones is up 0.4 per cent, the S&P 500 has lost 0.2 per cent and the Nasdaq has slid 1 per cent. Futures at 4.58am AEST are pointing to a loss of 10 points, or 0.2 per cent, at the open for the ASX.

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The coronavirus epidemic continued to weigh on the economy, the Fed said in the statement, released after the end of its latest two-day policy meeting, even as officials upgraded their immediate outlook for the economy.

The virus “is causing tremendous human and economic hardship,” the rate-setting Federal Open Market Committee said. “The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time.”

New economic projections released with the policy statement showed interest rates on hold through at least 2023, with inflation never breaching 2 per cent over that time. Policymakers saw the economy shrinking 3.7 per cent this year, far less than the 6.5 per cent decline forecast in June, and unemployment, which registered 8.4 per cent in August, was seen falling to 7.6 per cent by the end of the year.

All Fed policymakers saw rates staying where they are through 2022, with four eying the need for an increase in 2023.

Dissents

But in pledging to keep rates low until inflation was moving above the 2 per cent target, to make up for years spent below it, the Fed reflected its new tilt towards stronger job growth, announced late last month after a nearly two-year review.

Both dissenters to the statement, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari, took specific issue with the central bank’s guidance that it would keep interest rates where they are “until labour market conditions have reached levels consistent with … maximum employment and inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for some time.”

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Kaplan said he would have preferred to have “greater flexibility” once inflation and maximum employment were on track to reaching the Fed’s goals, an easier hurdle to reach. Kashkari’s dissent suggests he wanted a higher hurdle: for rates to stay where they are until core inflation – which often runs cooler than overall inflation – has reached 2 per cent “on a sustained basis.”

More to come

Reuters

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Wall Street rallies on new Fed stance, COVID-19 test progress


Declines in market-leading momentum stocks capped the S&P’s gains and held the Nasdaq in the red.

Shares of Abbott Laboratories jumped 7.9 per cent after the company won US approval to market a cheap, portable, rapid COVID-19 antigen test, which could be a step toward containing the pandemic that sent the US economy spiralling into recession.

Economic recovery was forefront in Fed Chairman Jerome Powell’s remarks made as part of the Kansas City Fed’s virtual Jackson Hole symposium. In the speech Powell outlined the central bank’s aggressive new strategy to support the economy by lifting inflation and returning the economy to full employment.

“We’re going to have low interest rates as far as we can see and COVID is on the way out because of the inexpensive test that Abbot is introducing soon,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “It gives investors two reasons to be positive about equities.”

But with last week’s initial jobless claims stubbornly hovering above the 1 million mark, according to the Labor Department, a return to full employment currently appears to be a long haul.

In late trade, the Dow Jones is up 0.8 per cent, the S&P 500 has gained 0.3 per cent and the Nasdaq Composite has shed 0.2 per cent. The ASX is poised to edge lower, with futures at 5.35am AEST pointing to a drop of 10 points at the open.

Of the 11 major sectors in the S&P 500, financials enjoyed the biggest percentage gain while communications services , weighed down by Netflix and Facebook, lagged.

Shares of Walmart and Microsoft rose 5.3 per cent and 2.7 per cent, respectively after announcing a joint bid for TikTok’s US assets.

Luxury retailer Tiffany & Co advanced 1.9 per cent after reporting stronger-than-expected profit just days after delaying its $US16.2 billion ($22.3 billion) sale to France’s LVMH.

On the other end of the retail scale, discount stores Dollar General and Dollar Tree also beat quarterly profit expectations.

Boeing Co rose 1.4 per cent after the European Union Aviation Safety Agency announced plans to begin flight tests of its grounded 737 MAX plane.

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Cosmetics maker Coty plunged 8.7 per cent after retail closures and weak demand led to a bigger-than-expected quarterly loss.

Advancing issues outnumbered declining ones on the NYSE by a 1.05-to-1 ratio; on Nasdaq, a 1.30-to-1 ratio favoured decliners.

The S&P 500 posted 37 new 52-week highs and no new lows; the Nasdaq Composite recorded 58 new highs and 20 new lows.

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Wall Street slides from record highs after Fed minutes


The S&P 500 and Nasdaq slipped from all-time intraday highs on Wednesday (US time) in choppy trading after the Federal Reserve ruled out for now more dovish monetary policy measures such as the yield curve control.

Under yield-curve control, the Fed would cap yields at a specific point on the curve by buying 2- or 3-year maturities, for example, to reinforce guidance that rates are not going up anytime soon.

Wall Street slid lower after the release of the Fed's minutes.

Wall Street slid lower after the release of the Fed’s minutes.Credit:AP

In minutes of the Fed’s July meeting, a majority of its monetary policy committee commented on yield caps and targets as a monetary policy tool. Of those who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment.

In late trade, the Dow Jones Industrial Average has risen 0.2 per cent, the S&P 500 is flat and the Nasdaq has slid 0.1 per cent. At 5.53am AEST, futures are pointing to a slide of 10 points, or 0.2 per cent, at the open for the ASX.



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Fresh pandemic surge has dented US economic recovery: Fed chief


Powell said that the upcoming jobs reports and other surveys will help flesh out the Fed’s economic outlook, cautioning that he did not “want to get ahead of where the data are on this.” But as he has for months, Powell again emphasised that the economy’s recovery depends on the country’s ability to keep the virus in check.

“The path of the economy is going to depend, to a very high extent, on the course of the virus and on the measures we take to keep it in check,” Powell said. “The two things are not in conflict. Social distancing measures and a fast reopening of the economy actually go together. They’re not in competition with each other.”

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As expected, the Fed’s policymaking board decided to keep interest rates, which are already near zero, unchanged as it concluded two days of policy meetings this week.

The Federal Reserve signalled in its statement on Wednesday that the Fed would continue to use “its full range of tools” to steer the economy out of recession, even as the virus significantly shapes the future of the economy.

“The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” the Fed’s top panel of policymakers said in a statement at the conclusion of two days of meetings.

After sharp declines, economic activity and employment “have picked up somewhat in recent months,” the Fed said. Economists have been closely watching July indicators, which could help explain whether the recovery from earlier this summer is beginning to fizzle as some states and cities reimpose restrictions on businesses to combat rising coronavirus cases.

The path of the economy is going to depend, to a very high extent, on the course of the virus and on the measures we take to keep it in check.

Fed chair Jerome Powell

“Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses,” the Fed statement read.

To support the flow of credit to households and businesses, the Fed pledged to increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace over the coming months. The Fed has said that its support of the markets should remain in place to help safeguard the broader financial system during the pandemic.

At his press conference, Powell said that the Fed was committed to keeping its lending facilities and other emergency measures in place not only during the shutdown and reopening, but also through the “long tail where a large number of people are struggling to get back to work.”

“We’re in this until we’re well through it,” Powell said.

For months, Powell has insisted that the virus will dictate an economic turnaround, which he says can’t happen until Americans feel safe going about their daily routines. Since the Fed’s last meeting in June, rising case counts have forced states to reimpose restrictions on business activity. Minutes from the Fed’s June meeting showed officials were worried that the United States could enter a much worse recession later this year if the pandemic is not contained.

Powell’s news conference comes as Congress clashes over another stimulus bill and an extension for enhanced unemployment benefits. On Monday, President Trump brushed off the new $US1 trillion Senate GOP coronavirus legislation as “sort of semi-irrelevant.”

Powell has repeatedly said that the Fed cannot heal the economy alone and that more help will be needed from Congress to ease the pain for millions of Americans and their businesses. But he has stopped short of telling lawmakers exactly what they should do or how urgently they should act, saying it isn’t his role to tell other parts of government how to do their jobs.

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At this week’s Fed meeting, Fed leaders were expected to discuss other policy tools, like forward guidance and asset purchases, without necessarily coming away with any firm conclusions. Economists are also awaiting the release of the Fed’s long-term monetary policy review, which could change the way the Fed approaches its inflation target.

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Zombies are stirring as the Fed creates a monster debt problem


Under the program the Fed can buy any bonds issued by a company that held an investment grade credit rating – even one only a “notch” above junk status – on March 22, when the program was announced. Effectively that means the Fed can buy bonds in the so-called “fallen angels,” or companies whose bonds have been relegated to junk status after that date.

Just the announcement of the program worked to thaw a market for high-yield bonds that had been frozen by the onset of the coronavirus pandemic. The stress in credit markets has disappeared and spreads and yields have shrunk.

Access to credit has been plentiful, with the Fed’s own data showing US non-financial debt increasing by more in the first quarter of this year than at any time in the past half-century. US companies borrowed more than $US750 billion in the March quarter.

With cash pouring into the junk bond market and the Fed acting as a form of underwriter for even risky corporate debt, perhaps it isn’t surprising that investors are taking risks that they might not have contemplated previously.

It was instructive that on Monday, before the Fed’s announcement of the start of direct corporate bond purchases, the US sharemarket was down as much as 2.5 per cent. It closed up nearly 1 per cent.

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Bond yields actually firmed slightly after sliding on fears of a second wave of the coronavirus, with the Fed’s actions seen as positive for the economy and markets. There is, therefore, a direct cause and effect relationship between the Fed’s actions and announcements and the share and bond markets.

That helps explain why investors, mainly retail, are buying shares in bankrupt companies such as Hertz or highly-leveraged and distressed retailers like J.C.Penney in the belief that the Fed’s interventions will produce a rising tide that will lift all boats, even the sunken ones.

The phenomenon of investors disregarding risk in the belief that they’ve passed it onto the Fed isn’t new. It’s been present in markets since the Fed first embarked on unconventional monetary policies during the financial crisis. The Hertz case is, however, an extreme example of how the Fed’s interventions distort markets by removing risk from any price signal.

The surge in borrowing in the US is another, albeit deliberate, consequence of the Fed’s actions, one that will complicate any pathway to more normal settings in a post-pandemic environment and weigh on the US economy in future.

The US corporate sector was already highly-leveraged even before the coronavirus outbreak. At the start of this year US non-financial corporate debt was already nudging $US10 trillion, or about 47 per cent of US GDP. A decade ago, after a major post-crisis de-leveraging, it was closer to 40 per cent.

More concerning, since the financial crisis – even as the debt levels have climbed – there has been a steady deterioration in the quality of the credit. About a third of the corporate bond market is now in the form of leveraged or non-investment grade bonds.

The levels of leverage and the weak quality of the credit may explain why the Fed has been prepared to take actions it hadn’t previously contemplated, even if it expands and perpetuates a class of companies best described as zombies, kept alive only because the interest rates on their debt are so low and credit is so freely available.

About a third of the corporate bond market is now in the form of leveraged or non-investment grade bonds.

The pandemic might otherwise have decimated the ranks of the zombies, or companies whose earnings wouldn’t cover their interest bills in a more normal environment. With the proportion of zombies among the listed US companies now approaching 20 per cent, that could have created economic carnage.

A problem for the future, and one that has been present since the financial crisis, is how the Fed and its central bank peers elsewhere can extricate themselves from the unconventional settings they’ve created and the unintended consequences and side-effects of those settings, the most potentially threatening of which are the excessive leverage and risk-taking they have encouraged.

On the evidence of the past decade, there is no exit path without implosions in markets, another financial crisis and, at best, another very deep recession. In these circumstances investors are clearly signalling that they expect more of the same.

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ASX set to surge higher as Fed fuels Wall Street rebound


But stocks and Treasury yields began to trim their losses as the day progressed. They popped decisively higher after the Fed said in the afternoon that it will buy individual corporate bonds. The purchases will be part of its previously announced program to keep lending markets running smoothly, which allows big employers to get access to cash.

Volatility is here to stay, at least for a little while. Nobody in the financial industry has a good way to forecast this.

Jason Pride, chief investment officer of private wealth at Glenmede

They’re also the latest reminder that the Fed is doing everything it can to help support markets, analysts said. Central banks have repeatedly come to the economy’s rescue over the years, and it was huge, unprecedented moves by the Fed earlier this year that helped put a halt to the S&P 500’s nearly 34 per cent sell-off on worries about the recession coming out of the coronavirus pandemic.

The S&P 500 rose 25.28 points to finish at 3,066.59, which is 9.4 per cent below its record set in February.

The Dow Jones Industrial Average gained 157.62 points, or 0.6 per cent, to finish at 25,763.16 after earlier being down as many as 762 points. The Nasdaq composite added 137.21, or 1.4 per cent, to 9,726.02.

“Volatility is here to stay, at least for a little while,” said Jason Pride, chief investment officer of private wealth at Glenmede. “Nobody in the financial industry has a good way to forecast this.”

Case numbers are still growing in states across the country and nations around the world. Governments are relaxing lockdowns in hopes of nursing their devastated economies back to life, but without a vaccine, the reopenings could bring on further waves of COVID-19 deaths.

China is reporting a new outbreak in Beijing, one that appears to be the biggest since it largely stopped its spread at home more than two months ago. In New York, the governor is upset that big groups of people are packing together outside bars and restaurants without face masks, and he threatened to reinstate closings in areas where local governments fail to enforce the rules.

That’s the biggest worry for markets: If infections swamp the world, governments could bring back the orders for people to stay at home and for businesses to shut down that sent the economy into its worst recession in decades. Even if that doesn’t happen, rolling waves of outbreaks could frighten businesses and consumers enough to keep them from spending and investing, which would itself hinder the economy.

It was just a week ago that investors seemed ebullient about expectations for a coming economic recovery. The hopes got a shot of adrenaline earlier this month when a report showed that US employers added jobs to their payrolls in May, a big surprise when economists were expecting to see millions more jobs lost. That raised expectations that the economy could climb out of its hole nearly as quickly as it plunged into it.

Crude oil cut losses and turned higher on signs members of the Organization of the Petroleum Exporting countries and allies were complying with a production cut, and on signs of rising fuel demand.

Crude oil cut losses and turned higher on signs members of the Organization of the Petroleum Exporting countries and allies were complying with a production cut, and on signs of rising fuel demand.Credit:AP

That optimism sent the stock market on a second leg of its rally, which began in March after the Federal Reserve and Congress promised unprecedented amounts of aid to support the economy. Besides its corporate bond buying program, the Fed has also cut interest rates back to nearly zero and expects to keep them there through 2022. Its chair, Jerome Powell, may offer more details about the Fed’s outlook in scheduled testimony before Congress this week.

All through its torrid rally, though, many professional investors were warning that the market’s gains may have been overdone considering how long and uncertain the economic recovery looked to be. The S&P 500 climbed back to within 4.5 per cent of its record high last week.

Some of the rally was likely driven by a big influx of individual investors into the market. Brokerages reported big increases in client numbers and trading earlier this year, and stocks popular with individual investors have returned 61 per cent since the market hit a bottom on March 23, according to Goldman Sachs. That’s much more than the 45 per cent rise for stocks popular with hedge funds and traditional mutual funds.

The yield on the 10-year Treasury note rose to 0.71 per cent from 0.69 per cent late Friday. It tends to rise and fall with investors’ expectations for the economy and inflation, and it had been above 0.90 per cent earlier this month.

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In Asia, South Korea’s Kospi dropped 4.8 per cent, Japan’s Nikkei 225 lost 3.5 per cent and the Hang Seng in Hong Kong fell 2.2 per cent. In Europe, France’s CAC 40 slipped 0.5 per cent, Germany’s DAX lost 0.3 per cent and the FTSE 100 in London dipped 0.7 per cent.

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Fed chair paints a grim economic picture


He noted that the country is going through a sudden and severe economic downturn that is “without modern precedent”.

More than 2.4 million people filed for unemployment last week in the latest wave of layoffs, bringing the running total to a staggering 38.6 million, a job-market collapse unprecedented in its speed.

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“It has already erased the job gains of the past decade and has inflicted acute pain across the country,” Powell said. “And while the burden is widespread, it is not evenly spread. Those taking the brunt of the fallout are those least able to bear it.”

The Fed has cut its benchmark interest rate to a record low of zero to 0.25 per cent, purchased $US2 trillion ($3.1 trillion) of Treasury and mortgage-backed securities and launched a number of programs aimed at keeping the financial markets functioning.

Powell did not send any signals in his remarks about what the Fed might do next but Fed Vice Chairman Richard Clarida, speaking at a different event, repeated the Fed’s pledge to use all of its tools to protect the economy and promote a strong rebound.

“The Federal Reserve will continue to act forcefully, proactively and aggressively as we deploy our toolkit … to provide critical support to the economy during this challenging time,” said Clarida, who spoke by webcast to the New York Association for Business Economics.

Powell and Fed board member Lael Brainard spoke at the 15th “Fed Listens” event, which the central bank began holding last year in an effort to gather public input into possible changes the central bank should make in the way it conducts interest-rate policies. The Fed still hopes to release its findings later this year.

Pat Dujakovich, president of the Greater Kansas City AFL-CIO, told the Fed officials that his concern is that many workers, especially those who had just gained jobs as unemployment fell to a 50-year low before the virus struck, could lose hope of ever getting back into the labor force.

He said while many low-income workers had been helped by the Paycheck Protection Program and expanded unemployment benefits, “The question we are struggling with is what is going to last longer, the (benefit) money or the virus.”

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Powell said it is “tragic” and “heartbreaking” to see unemployment surging now after it had been so low at the start of the year.

“This is a hard, hard blow,” Powell said. But he said it is important to remember that the economy will recover and disadvantaged communities “will always have our support.”

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The Fed pleads for help as it warns of long-term US recession


A severe decline in economic activity and employment was occurring and the job gains of the past decade had been erased, he said, with a Fed survey showing that almost 40 per cent of those in households making less than $US40,000 ($61,982) a year had lost their jobs in March.

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In March more than 20 million Americans lost their jobs and the unemployment rate shot up to 14.7 per cent. The June quarter will be worse, reflecting the full brunt, so far, of the virus.

In response to the pandemic the Fed has done a number of unprecedented things. It cut the federal funds rate close to zero, pumped vast amounts of liquidity into the financial system and has started buying US Treasury bonds, corporate bonds, junk bonds and mortgages and other securitised debt.

The government has also unleashed unprecedented stimulus of nearly $US2.9 trillion, but it is an indication of the level of the Fed’s concern – and its conviction that there’s not a lot left in its armoury – that Powell pleaded for even more fiscal support.

Jarring disconnect

Wall Street, as it had in response to Dr Fauci’s statements to the US Senate a day earlier, slid. The S&P 500 benchmark index fell 1.75 per cent, taking its two-day decline to just under 4 per cent. But the market is still about 26 per cent above its March lows.

The sharp market recovery from the end of March defies conventional wisdom and history. One of the strongest correlations between the sharemarket and other metrics has been with the unemployment rate. And it had been a near-perfect correlation – as unemployment fell below 4 per cent in the US to historically low levels the market soared to record levels — up until March 23, when the sharemarket broke upwards even as the unemployment rate soared.

It’s a massive and jarring disconnect that underscores the level of confusion and uncertainty about the pandemic’s economic consequences and their depth and longevity.

The market is trading at record levels of companies’ estimated future earnings even as the level of those profits becomes less certain, with most US companies unable to make any forecasts.

‘Path ahead highly uncertain’

The White House isn’t helping, projecting the same optimism and a conviction that the economy will rebound in a “V-shaped” recovery as it re-opens as the markets, even though senior health officials like Dr Fauci warn of the dangers of trying to resume life and business as usual before the virus is contained.

Powell didn’t explicitly address the Fed’s view of the shape and duration of the economic downturn, but repeatedly referred to the potential long-term damage that could occur as he argued for more fiscal support.

The economic response so far, he said, had been timely and appropriate, but might not be the final chapter given that the “path ahead is both highly uncertain and subject to significant downside risks”.

Donald Trump is dithering over whether to support Democrat calls for another $US3 trillion package of relief spending. If there is to be more fiscal support, he wants more corporate tax cuts whereas the Democrats are focused on financial support for households.

Republicans generally appear concerned about an even greater blow-out in the US budget deficit, which is soaring towards $US4 trillion and driving the federal government’s debt-to-GDP ratio above 100 per cent and through the record level of 107 per cent set during World War II.

But they supported Trump’s tax cuts and increased spending that started the sharp blow-out in deficits and debt ahead of the pandemic.

Going negative?

Trump, who had a been a fierce critic of the Fed until relatively recently – he was arguing for significant interest rate cuts even when the US economy was growing relatively strongly – is now urging the Fed to use negative rates.

Powell gave that urging short shrift.

“I know there are fans of the policy, but for now it’s not something that we are considering,” he said.

There has now been lengthy experience of negative rates in Japan and Europe, but no resulting increase in bank lending, inflation or economic growth of any note.

If anything, because negative rates impact lending margins and the viability of pension funds they probably limit lending and growth by choking the ability of banks to generate profits and capital.

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While Trump might like the idea of being paid to borrow, negative rates aren’t a gift but a signal of extreme economic stress and a dearth of central bank options.

Yet the ways things might head in the US, if the re-opening of the economy Trump has been pushing for so aggressively results in a surge in infections and deaths and the fiscal response proves inadequate, negative rates might be the only remaining tool the Fed has to respond to the economic tide.

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ASX dives lower as Fed move spooks markets


Australia’s volatile sharemarket has plunged almost seven per cent after sentiment for equities suddenly soured in the US following rate cuts from the Federal Reserve and other central banks.

Futures had been pointing to a one per cent rise on Monday but the benchmark S&P/ASX200 dropped 373 points, or 6.74 per cent, to 5,166 at 1015 AEDT on Monday.

The ASX has tumbled in early trade on Monday.

The ASX has tumbled in early trade on Monday.Credit:Louie Douvis

The broader All Ordinaries index sank 368.5 points, or 6.59 per cent, to 5,222.2 after the US futures markets opened lower following Federal Reserve and other central bank rate cuts.

Industrials shed almost 10 per cent, while the energy and consumer discretionary indices dived more than eight per cent after 15 minutes of trading.



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