US stocks erased gains after investors mostly viewed the FOMC statement as a dovish confirmation of outcome-based guidance and as Fed Chair Powell failed to deliver any surprises. The Fed kept rates near zero and their upgraded forecasts show that rates will remain low till at least 2023. Today’s policy decision was not unanimous as Kaplan (wanting more rate flexibility) and Kashkari (requiring inflation to reach 2% on a sustained basis before moving) dissented seeking more forward guidance.
Expected change to the statement following Jackson Hole
The Fed expects to maintain an accommodative stance of monetary policy until inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.
The June forecasts were a bit too pessimistic, so no one is surprised with the significant upgrades with this year’s GDP, unemployment rate, and PCE inflation projections. The first look at 2023 show the 13 of 17 officials expect rates to stay near zero, the economic rebound will ease toward 2.5%, the unemployment rate improves to 4.0%, and inflation finally reaches their 2% target, still nowhere near overshooting it. The forecasts were dovish enough to keep risky assets supported initially.
While much of the projections saw improvements, the Fed downgraded their 2021 GDP forecast from 5.0% to 4.0%. That should raise some alarms that the short-term outlook will warrant more action.
Press Conference/ Q&A
Fed Chair Powell’s prepared remarks didn’t rock the boat as he reiterated they remain strongly committed to achieving their policy goals. The economy will need to be far into its recovery for inflation to come back. Powell reiterated his case for further fiscal support, noting that 11-million people are still out of work and will need additional support.
It looks like financial markets were well positioned for this FOMC decision, the Fed confirmed lower rates for longer, but the recent pickup in economic activity has some policymakers, four to be exact, thinking about raising rates. US stocks ran up all week and failed to extend their gains following the press conference that did not deliver any dovish surprises. Buying longer-term Treasuries or negative interest rates are not quite yet on the Fed’s radar.
Crude prices rose after the EIA reported a surprise draw and after the Fed indicated rates will stay near zero for at least three years. The Fed’s policy decision basically keeps the bearish outlook intact for a softer dollar, which should provide underlying support for commodities across the board.
Following yesterday’s API draw of 9.5 million barrels, some energy traders were not impressed with the EIA report of a 4.4 million drop in stockpiles. The energy markets are continuing to work their way to balance as inventories are clearing as demand normalizes.
Hurricane season is greatly impacting the total crude and product exports, which sank to the lowest since June, and that will likely be the story for the next couple weeks as Hurricane Sally works her way through.
WTI crude is back above the $40 level but it might struggle here as energy traders start to doubt that the OPEC+ deal will last much longer. The Saudis are not going to save the day and the lack of compliance with the cheaters, UAE and Iraq, will mean oversupply concerns are possibly just around the corner. Tomorrow’s OPEC+ meeting is widely expected to see no fresh calls for reduced output, which means they will try to map a schedule for the cheaters to make up their shortfalls.
Despite a dovish Fed, gold prices struggled after Fed Chair Powell emphasized the further need for more fiscal support from Congress and after the latest projections showed inflation may finally test their 2.0% target in 2023. Gold did not get any dovish surprises, but the longer-term outlook still looks bullish as the Fed will keep rates near zero and will likely do more as the economy struggles to get back its strong labor market.
Gold did not get what it needed to break above $2000 this week, but with rising risks to the outlook due to the lack of support for Washington DC, Wall Street will see more from the Fed before the year is over. The Fed has more ammo and they will use it, they will have to wait to see what Congress does first.