Bond Market Monthly September 2020 The Fed is in control Kris Xippolitos Head – Fixed Income • At the Jackson Hole Economic Symposium on August 27, US Federal Reserve Chairman Jerome Strategy Powell announced changes to the central bank’s monetary policy framework. During his speech, +1-212-559-1277 Powell focused specifically on the persistent undershoot of inflation from their 2.0% longer-run
[email protected] objective. The Fed will adopt flexible average inflation targeting that will average 2.0% over time. Joseph Kaplan This implies a willingness for the Fed to allow inflation to run above 2.0%, without the need to tighten Fixed Income Strategy policy. Powell also expressed some modification to the Fed employment mandate, implying labor +1-212-559-3772 markets can improve, inflation can rise, and policy rates can remain low.
[email protected] • With forward inflation expectations still below 2.0%, policy rates are likely to be on hold for some time. Eurodollar futures are not pricing in rate hikes until 2024, while Fed futures are also implying lower for longer. In our view, we would not expect the Fed to consider raising policy rates until the recovery is sustained, labor markets improve and inflation stabilizes at or above 2.0%. • For now, long-term US rates will likely be contained by a slow economic recovery, large-scale asset purchases by central banks, possible re-emerging concerns over rising COVID infections and the delay of additional fiscal stimulus. However, a credible COVID vaccine could push 10-year yields back over 1.0%.