Fed Minutes: Stimulus Is Working But Uncertainty Persists. Here’s How Markets Reacted.

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Markets were largely indifferent to the FOMC's latest minutes Wednesday, as investors have already digested the Fed’s viewpoint. 

All three major U.S. indices ended higher, with the S&P 500 up over 1.6%, the Dow up 1.5% and the Nasdaq ahead by 2%. 

The yield curve compressed, a signal that investors are buying up long-dated bonds and moving out of short bonds, as inflation and economic growth expectations remain somewhat cautious. Bond investors can sometimes communicate different viewpoints from stock investors. The yield on the 2-year treasury bond rose to 0.16%, with the yield on the 10 year treasury bond fell to 0.68%. 

Here were the positives from the minutes:

"Under the staff’s baseline assumptions that the current restrictions on social interactions and business operations would ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, although a complete recovery was not expected by year-end.” 

“Fiscal programs were delivering valuable direct financial aid to households, businesses, and communities that would provide some relief during the economic shutdown. In addition, economic activity was being supported by actions taken by the Federal Reserve, including lending facilities.” 

Here were some negative comments:

"The staff observed that uncertainty regarding the economic effects of the coronavirus outbreak was extremely elevated and that the historical behavior of the U.S. economy in response to past economic shocks provided limited guidance for making judgments about how the economy might evolve over coming quarters. A more pessimistic projection was no less plausible than the baseline forecast. In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.” 

The Fed also said temporary layoffs could become permanent. 

“It was kind of a reiteration of everything we’ve heard from Fed officials over the last few weeks and that is that they will do whatever it takes [to stimulate the economy],” said Danielle DiMartino Booth, former adviser to the President of the Dallas Fed and Founder of Quill Intelligence.  

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