Market Overview

8 April 2020

FOMC Minutes: Eternal Sunshine of the Spotless and Ever-Innocent Fed's Mind

A detailed record of the Federal Open Market Committee (FOMC) policy-setting meeting held more than two weeks ago, on March 14-15, is expected to be released today at 18.00 GMT. Well known as FOMC Minutes, it will surely be used by officials of the US regulator for classical show of generosity and relevance to the moment of their gestures and the inevitability of monetary interventions with trillions of Dollars for the economy and the world financial system.

In the glossy, public version of the FOMC discussions, they probably will focus on the long-term nature of all measures that are expected to be used almost without limits as much and as long as necessary. The document would hardly contain any vestige of doubts in the direct connection between the huge amounts of government bond purchases for the US Treasury, which is actually a different pocket of the same Stars and Stripes jacket worn by Uncle Sam, and sums that are several times smaller which will be used for the purchase of corporate securities that was taken into account after the allocation of money to feed the eternally alive and dollar-centred system as a whole was completed. In fact, the financial support is not centred around any economic entities or even around banks, but on the Treasury and this, technically, was not free of charge either since the holder of federal bonds will also receive a certain coupon benefit. In this case, the largest holder of the American debt is the legally independent Federal reserve system (Fed).

The financial justification for this "support" would clearly be left out of brackets as the old maxim stating that "the war will justify everything". Now it is possible to rephrase it to "virus will justify everything". Most market participants are probably going to focus their attention not on the formalities of the FOMC protocol language but rather on how much officials from the Fed are willing to over-colour or to dramatise the present situation. Any verbal reservations and hints as to how deep the rabbit hole - in terms of the scale of the production, service and the output in general - will decline in the next couple of quarters, when the economy is expected to recover, will be very sensitively perceived by the investment community.

Combined with the latest information, that the number of new infections is decreasing in Italy for the fourth day in a row from 4,805 to 3,039, while in the United States it has increased again over the last two days from 25,316 to 33,331 yesterday, after seemingly reached a peak of 34,196 on April 4, and the number of American deaths has unfortunately reached a daily record of 1,970 on April 7 after the previous 1,330 peak on April 4, any further reaction of the S&P500 and other US stock indexes, could depend on the degree of calm or alarm signals that the chief financial regulator of the United States will show in its official report. Although these are the minutes of a meeting dead and gone, in the rapidly evolving situation the Fed could well choose the most convenient format for its accents that are consistent with their goals to influence the minds of the market crowd in one direction or another.

As long as acting Fed officials are strongly bound by formal and informal red lines in their statements, the assessments expressed on April 7 by Ben Bernanke, - a former chairman of the Fed in 2006-2014 and who is also a famous scholar of the Great Depression period - may be of extreme interest now. It could be relevant to remember that it was Bernanke who invented many of the emergency lending programs, like quantitative easing (QE), that the central banks are now re-using. He also had a hand in reviving Milton Friedmans's concept of "helicopter money".

Mr Bernanke said that he thinks the Great Depression is a bad comparison to make to the current economic nosedive caused by the shutdowns in reaction to the pandemic. "People have made comparisons to the Great Depression. It's not a very good comparison. The Depression was 12 years long," he said at an online presentation on Tuesday sponsored by the Brookings Institution, where he is a fellow in residence.

"This is like a natural disaster, and the response is more like an emergency relief than it is a typical stimulus or anti-recessionary response," Bernanke stated. As Mr Bernanke said he was "pretty pleased" with the fiscal and monetary responses, but even "more will still be needed", and his forecast for the economy was pretty grim: the US gross domestic product (GDP) on an annualised basis could fall by 30% or greater in the second quarter of 2020, and the prospect is that the economy could be partly opened up in the summer and closed back down again in the autumn. "There are things we can do to open up the economy, significantly perhaps, but I don't see the economy returning to a more normal state until there is much greater confidence... that opening up the economy won't restart the crisis," said the former Fed Chairman. Therefore, he also doesn't see a V-shaped US recovery after a steep fall. According to Bernanke a couple of years may pass before the economy regains its footing. "So overall, it could be a very bad year for the U.S. economy," said Bernanke. But, at the same time, "within a few years" the US economy "will show only modest marks of this experience", he predicted.

We can only assume whether the thoughts voiced by Mr. Bernanke represent his personal view or if they were geared towards a kind of trial balloon or an attempt to put the Fed's toe in the water to prepare the future market's reaction or to gain the time to pull out the further "financial stimulus" from Uncle Sam's sleeves in a scaremongering way. However, if the focus is only put on his words, the possible growth on the market for a number of assets may be delayed once again but just for several days or for a couple of weeks. This version may be taken as the basic one. However, in an alternative scenario, such mantras may really scare the markets to death for a longer time. If the Federal Reserve and Treasury's plan include simply borrowing as much as possible and run into the area of trillions of dollars at close to zero percent or even having an excuse to lower interest rates below zero during the course of the year and printing as much of their own domestic "pocket" money as possible to prolong the "eternal sunshine of the spotless mind" of the Dollar-centred financial system forever and ever, then it may serve a poor service to the markets in the next few months or even longer. It may be hard just to erase all past bugs and flashbacks almost like in a cult movie and to keep its ever-innocent face intact while escalating the situation on a gloomy news background this time. These tactics are lost and gone forever, or are they not?

The Fed's "plans" are hardly consistent with the intentions of Donald Trump to keep his seat in the Oval Office for another four years. Perhaps the US President and his team will press all the levers they have to launch the most positive new financial agenda, but most of the influential mass media are in the hands of their opponents. Everyone will probably form their own point of view about the fresh official and non-official Fed signals in accordance with the previously accumulated personal background of observing the Fed's actions and corresponding market reactions over previous years. Well, the most impartial judge at any given time will probably be the technical picture on charts with stock indexes, specific shares and currencies vs the US Dollar, as well as a fair analysis by all available analytical methods from the trader's personal tools.

This time and as always, we must become swimmers as not to lose our Clementine.


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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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