Morning Report

Federal Reserve and Bank of England Policy Decisions

This week marks the final week of Central Bank decisions and an opportunity to set the monetary outlook for 2021. The Federal Reserve announced its policy decisions yesterday, while the Swiss National Bank, Norges Bank, Bank of Japan and Bank of England announce their policies today. Although today had the potential of being a field day for Central Bank enthusiasts, all of the banks kept their bank rate unchanged (except Japan, who’s monetary policy decision will be delivered after this commentary is published).

Federal Reserve

The Federal Reserve kept their federal funds rate unchanged at 0 to 0.25 percent and decided to maintain its asset purchase programme of Treasury securities and Mortgage based securities at $120 billion per month. This was generally in line with consensus expectations, so the market reaction was muted. EURUSD increased by approximately 0.4% in the hour after the decision as the language used by the FOMC confirmed their dovish approach.

In the FOMC monetary policy statement released after the decision, the bulk of the language was unchanged, with a few extra lines of guidance on how the securities purchases would be allocated and committed to its accommodative stance until progress had been made towards the “Committee’s maximum employment and price stability goals”. The policy meeting was a non-event and the Fed decided against increasing quantitative easing for the sake of it. Some players in the market, including Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, believed that this was a good opportunity for a more hawkish approach, but Powell didn’t see it that way, stressing in his press conference that fiscal policy would be the most effective way to navigate the pandemic.

Bank of England

For the Bank of England, the story is the same. The BoE voted unanimously to keep the Bank rate unchanged at 0.10% and leave quantitative easing unchanged at £895 billion, again completely in line with expectations. The notes from the meeting gave nothing away, except that Governor Andrew Bailey said that the economic outlook is uncertain, and that the vaccine is likely to reduce downside risks. Hardly ground-breaking stuff. In the hour after the policy decision, GBPUSD fell by 0.2%, but it is probably foolish to attribute this solely to the monetary policy decision as there is a lot of Brexit noise at the moment, making the pound very volatile.

On Brexit, the MPC gave a clear signal that in the unlikely event of a no-deal, it would increase “the Committee’s tolerance for a temporary overshoot in inflation”. This means that the central bank would be willing to increase quantitative easing further with a no-deal Brexit, as the economy would be in more need of support.

Both major central bank decisions were in line with consensus expectations and so do little to change the outlook for the dollar and pound in the longer term. There was some noise, that due to the improving economic outlook, which we will likely see in the first half of 2021, there might be an opportunity for a more hawkish approach, but both Bailey and Powell have made the sensible decision to not be too complacent and committed to ultra-loose monetary policy for the foreseeable future.