In August, we witnessed a rapid acceleration in expectations for the Fed’s long-awaited inflation framework shift. Although it seemed rather precipitous at the time, the framework review had been going on for more than a year with the initial round of news coverage way back in early 2019. When we first heard about it, it seemed like common sense. The Fed acknowledged it hadn’t quite created the inflation it had hoped to create and perhaps the time had come to reevaluate its strategy in pursuing its dual mandate of price stability and full employment. Everything seemed to be in order there!
Fed’s Daly offered a sneak peek of the road ahead in June 2019 by saying the Fed would have to do a lot of good communication and credibly pursue its goals in order to adjust its inflation framework. Daly’s thesis was that there could be an argument for the Fed to provide more stimulus in light of inflation running persistently lower than expected.
In the year that followed, talk of the framework revamp continued from the Fed. In October 2019, Powell specifically said the review of the framework would continue into the middle of 2020. Other Fed members provided glimpses as to what the results might entail: balance sheet policies, forward guidance shifts, and per Vice Chair Clarida, “additional tools for easing policy when the effective lower bound is binding.” In other words, the tools the Fed will use to provide stimulus when they’ve already exhausted the impact of the Fed Funds Rate being at 0-0.25%.
Those tools amount to the big news the Fed is expected to deliver. The framework change at the end of August was merely the Fed’s way of changing its job description to allow the new tools to be announced. Before that, even Fed speakers had been clear in saying that the framework review was on the back burner due to covid. Then in July, several Fed members began talking about the framework review again. Powell said deliberations would ramp up in the near future. That was on July 29th. The only significant “near future” event after that was the Jackson Hole speech, unless we were going to wait all the way until the September Fed meeting.
The takeaway for market participants and journalists was that the Fed would use Jackson Hole to preview the inflation framework change to be announced at the September meeting. But instead, the Fed actually dropped this little gem: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm which said they unanimously approved the framework updates.
Why didn’t they just wait to announce that 2.5 weeks later with the official policy announcement? There’s only one reason. They must have something even more substantive planned for tomorrow. As to what that might look like, see Clarida’s hints above, as well as my commentary from yesterday morning. As to the bond market understanding the gravity of the announcement, just consider that 10yr yields are PERFECTLY centered in their post-covid range and have been consolidating in an incredibly narrow and sideways pattern since the Fed Minutes were released in mid-August.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-01 : -0-01
0.6789 : +0.0099
|Pricing as of 9/15/20 10:44AMEST|
Tomorrow’s Economic Calendar