Fed Remains Dovish, Focuses on Labor Market (July 30, 2020)

Brian Cheung: Brian Chueng here, so let's expand a little bit on the uncertainty bit of it, no real surprises coming out of that Fed meeting yesterday. But it seemed like the Fed might be teeing up some sort of forward guidance in the September, maybe November meetings. What are markets looking for? What do they want to see from the Fed? Is it some sort of yield curve control where they're being really active in the yield for maybe medium term US Treasuries? Or is it just some reassurance that the Fed won't be raising rates, even though Chairman Powell has already said, we're not thinking about thinking about thinking about thinking about raising rates?

John Bellows: Yeah, you know, let's just start with the pricing. So five year yields are around twenty five basis points today. That's not pricing a hike in the next four years and maybe start pricing hike, hike a little bit after that. And so whatever the Fed says in terms of forward guidance, I think is already reflected in yields. And I think the market largely understands the Fed's going to be on hold for a long time. Powell's been very explicit about that and I think that's reflected in pricing. My own view is that in that environment, something like the yield curve caps on the front end are kind of redundant, and not really necessary. They don't really add much. Yields are already low. The market already understands the Fed's forward guidance. And so I think yield curve caps on the front end really don't have that much. And one thing I would think about and I think could surprise people is what the Fed does with their asset purchases. And I think this is something that's evolving. And I don't think is as clearly priced in the market. And in particular, I think the Fed is likely to say that their asset purchases are explicitly intended to support financial conditions and explicitly intended to keep yields low. And if they say that it would be consistent for them at the same time extend the maturity of their purchases. So extend more purchases in the back end and also to indicate that they're going to be purchasing for quite a while, purchases are not just through the end of the year. Purchases are likely to be going on into '21, potentially even even longer than that. I think that type of announcement from the Fed is not fully in the consensus yet, and that's something that could surprise people. But I think is totally consistent with a Fed that's looking to add more accommodation and looking for ways to do that. So that's what I'd be looking for in the next set of announcements.

Adam Shapiro: All right, we appreciate your insight, John Bellows, Western Asset portfolio manager. All of us keeping an eye on the Fed and all the best to you.