Fed's "Whatever It Takes Moment" Is a Big Flop
"We have seen some signs in recent weeks that the increase in virus cases and the measures taken to control it are starting to weigh on economic activity," Fed Chair Jerome Powell said at a virtual news conference on Wednesday, as reported by the WSJ.
Here are the highlights of a Press Release following the Fed's FOMC Meeting Today.
- Full Range of Tools: The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
- No Change in Fed Funds Rate: 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. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent.
- Monitoring: The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy.
- Balance Sheet Expansion: To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.
- Large Scale Repos: The Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
- Interest on Reserves: The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 0.10 percent, effective July 30, 2020.
- Do Whatever it Takes: Effective July 30, 2020, the Federal Open Market Committee directs the Desk to: Undertake open market operations as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions
Whatever It Takes
But realistically, there is nothing shocking or new in today's announcements. And the announcement itself was boring.
Contrast this effort to the ECB and its bond crisis in 2012.
On July 26, 2012, ECB president Mario Draghi gave a famous speech that rocked the European bond markets.
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
Q: So what did Draghi do?
A: Absolutely nothing.
The ECB did not start QE until years later.
However, bond yields on Italian, Portuguese, Greek, and Spanish bonds plunged. A freefall in the price of gold lasted for years.
Italy 10-Year Bond Yield
Chart from Trading Economics.
Although the ECB took no direct actions, Draghi's speech restored confidence in the ECB.
Doing nothing worked for the ECB. Doing nothing will do nothing for the Fed.
But what else can be done?
How about Japanese Style Price Fixing?
For discussion, please see Japanese Style Price Fixing by the Fed is On the Way.
That did not come up in the official comments but it's nearly certain to have been discussed.
But when implemented, the Fed will have as much success as the Bank of Japan. In other words, none.