Dollar traders seem to be unhappy that the vast majority of Fed officials expected interest rate to stay at 0.00-0.25% range till the end of 2022. More importantly, Fed sort of kept the floor regarding asset purchases, and said, “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”.

USD/JPY drops through 107.08 support after the release and is on track to take on 105.98 support next.

USD/CAD also drops through 1.3356 temporary low to resume the fall from 1.4667, towards 100% projection of 1.4667 to 1.3855 from 1.4048 at 1.3236.

In the new economic projections (median), Fed expects GDP to contract -6.5% in 2020, then rebound by 5.0% in 2021, below slowing to 3.5% in 2022. Unemployment rate is expected to hit 9.3% by the end the of year, then dropped back to 6.5% at 2021 end, and 5.5% in 2022 end. Core PCE inflation is projected to be at 1.0% by 2020 year end, then gradually climb back to 1.5% in 2021 end, and 1.7% in 2022 end. Federal funds rates are expected to stay at 0.1%, i.e. the current target range, throughout projection horizon till 2022.

As for the dot plot, the vast majority of policymakers expected interest rate to stay at 0.00-0.25% till end of 2022. Only two members expected a hike in 2022, one to 0.25-0.50%, and another to 1.00-1.25%.

Full projections.

Fed left federal funds rate target rate unchanged at 0.00-0.25% as widely expected, by unanimous vote. FOMC also pledged to maintain the target range “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Additionally, Fed will “increase its holdings of treasury and MBS “at least at the current pace”.

In the accompanying statement, FOMC said that the coronavirus and containment measures “have induced sharp declines in economic activity and a surge in job losses”. Weaker demand and significantly lower oil prices are “holding down consumer price inflation”. Though, financial conditions “have improved” due to policy measures.

Fed also said it will “continue to monitor implications of incoming information” and pledged to “use its tools and act as appropriate to support the economy”. The range of information watched include “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

Full statement below.

Federal Reserve Issues FOMC Statement

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.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

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. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

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. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

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. In addition, 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.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

FOMC meeting is the major focus for today and there is no doubt that Fed will keep policy unchanged. Federal funds rate target will be held at 0.00-0.25% while the QE-without-limit program will be maintained. A major focus will be on the first update to economic projections since last December. In particular, the expected strength of recovery in H2 would be revealed, as well as the time frame for the economy to go back to pre-crisis level. Given the strong May non-farm payroll report, there might be some pleasant surprise to the unemployment projections. Meanwhile, inflation forecasts could be off the mind of traders for now.

Fed’s view on the economy will be heavily tied to its projected path of emergency stimulus exit. It’s still too early to call for an end of the stimulus for now. But eventually, Fed needs to lay down the conditions, and possibly the time frame. Unemployment rate has improved while stock markets are at record high, while economy is gradually reopening. Fed might hint on ending some of the lending program at least. This would be the second focus.

The third focus would be on any information regarding “yield curve control”. WSJ reported over the weekend that officials are debating on whether to reinforce low-rate pledge with yield caps at the long-end. That could be seen as a way to keep long-term rates low, and help the economy to transit as Fed moves out from the current emergency measures at a later stage. Fed Chair Powell might reveal some information on his ideas.

Here are some suggested readings:

• FOMC Preview – Standing Ready to Add Stimulus Despite Signs of Recovery
• Fed to Sit Tight as Outlook Turns Brighter; will Powell Defy the Optimism?
• FOMC Meeting Preview: Three Key Themes to Watch
• June Flashlight for FOMC Blackout Period