Fed: ‘Lower for longer’ and… YCC? – UOB

The Fed is seen keeping the accommodative stance around current levels of interest rates until 2022, while the door remains open to a probable implementation of ‘yield curve control’ (YCC), suggested strategists at UOB Group’s Quarterly Global Outlook.

Key Quotes

“The Fed has demonstrated it will do whatever it takes, beyond interest rate cuts and asset buying, to restore financial market stability, smooth out US dollar funding conditions and safe-guard the economy. The Fed’s decisive actions are seen as effective to prevent the financial market from becoming a compounding factor to worsen the COVID-19 impact to the real economy and US households.”

“Going forward, as FOMC Chair Powell pledged, we expect the Fed will do more especially when the 'unprecedented' 2Q comes to pass. On 15 Jun, Fed’s Secondary Market Corporate Credit Facility (SMCCF) started to buy individual corporate bonds (instead of just ETFs) and it also launched its US$600bn Main Street Lending Program administered by Boston Fed. We expect the Fed to keep its near zero percent policy rate until at least 2022. With the Fed now engaging in discussion on yield curve control (even as its effectiveness 'remains an open question'), we believe the next Fed move will be yield curve control (YCC) so as to make monetary policy even more accommodative, to be announced possibly by 15/16 Sep 2020 FOMC. That said, we still hold the view the Fed will not want to push rates beyond zero, into negative territory, a view affirmed by the dot plot.”