What has happened
Whilst the markets initially welcomed the Federal Reserve statement it did not take long for sentiment to be soured by the gloomy economic projections.
The Federal Reserve’s economic projections dampen optimism
The Federal Reserve yesterday reiterated its desire to keep interest rates near zero until the end of 2022. The justification for this - the expectation that GDP won’t return to its pre-recession levels until at least 2022 - has depressed markets a bit today however. This is somewhat more pessimistic than some international bodies that have suggested that most of 2020’s lost growth will be recouped in 2021. Whilst this economic projection struck somewhat of a sober tone, the Fed effectively placed a floor on what they could buy, saying that they would continue with quantitative easing ‘at least at its current pace’ which raises the possibility of an upside surprise to bond buying in coming months.
Brexit talks remain challenging
This is of course not a surprising headline but reports yesterday suggested that the European Parliament may veto a deal if there were not ‘robust’ safeguards around the most contentious elements such as level playing field provisions. This on the face of it is a hardening of the EU’s stance and comes as Michel Barnier insisted that the UK send ‘clear and concrete signals’ that it is willing to compromise. The key summit for this will be a meeting between UK PM Johnson and EC President von der Leyen later this month. The EU’s tougher stance could be a tactic so that the concessions von der Leyen offers seem larger but regardless as 2020 ticks on the risk increases. It appears highly unlikely that the UK will opt for a delay to the transition period ahead of the 30th June deadline however we believe this is rather an artificial deadline and 11th hour extensions could be agreed if seen as mutually beneficial to both parties.
What does Brooks Macdonald think
The reiteration of the ‘lower for longer’ message is undoubtedly welcome from the Federal Reserve, but we did not see much in terms of new news. Specifically, there wasn’t any implementation of further quantitative easing or ‘yield curve control’ that had been speculated by economists going in to the meeting. Disappointment on that front combined with a less positive economic outlook has given risk asset reason to retrench after the very strong fortnight for equities.