US: What To Expect From The December FOMC Meeting

In this regard, the Fed will leave the Fed funds target rate at 0-0.25% next Wednesday, promising to keep it there until the goal of maximum employment and inflation being “on track to moderately exceed 2% for some time” is met – their “dot” diagram will continue to suggest this won’t happen before 2023.

We could see a change in guidance relating to the asset purchases, which currently stand at $80bn of Treasuries and $40bn of Mortgage-Backed Securities each month. At present, they merely comment that “over coming months” the purchases will continue “at least at the current pace”. Officials have hinted they could make the pace of purchases more conditional on economic conditions. They may also make the point that tapering of purchases must happen before they would even consider raising interest rates more forcefully. This may, at the margin, help to press down borrowing costs.

Capping yields a step too far right now

They could be more aggressive and seek to keep a lid on longer-dated Treasury yields, fearing that if the 10Y yield continues to rise it could constrain the recovery. The action could involve focusing a greater weighting of asset purchases at the longer end of the yield curve at the expense of fewer purchases at shorter durations.

We have our doubts that they will do that just yet though and will instead keep it in their toolbox for future use. The 10Y yield remains below 1%, which isn’t exactly threatening. We see it as more of a tool that could be used if there is a perception that Treasury yields are rising too far too quickly. That is more likely in an environment next year with a full economic reopening and the Fed being wary that rising borrowing costs threaten to unnecessarily impede the recovery.

After all, once a critical mass of people receive the inoculation, which we assume will happen during the second quarter, this can give consumers both the confidence and the freedom to fully re-engage with the economy. With savings levels having been replenished, there is a sense that consumer service sectors could experience something of a boom as people “make up for lost time”.

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