Today’s Fed meeting was more of a market mover than usual, as evidenced by the stock market hitting a record high this afternoon. For our Sponsors that watch the 10-year treasury closely, Fed Chair Powell did not disappoint today! He did everything he could to convince jittery bond markets that there is no reason to panic (sell). Recent developments (Over $3 trillion in stimulus, vaccine distribution numbers higher than expected) have sent GDP growth and inflation predictions upward. Powell is always hyper aware of Bernanke’s infamous 2013 “taper tantrum” press conference that sent 10-year yields rocketing within minutes.
Today, Fed Chair Powell made several specific statements with the obvious intent of removing any ambiguity or uncertainty.
- The policies of rates at zero percent and $120 billion in monthly bond buying are in full effect, with no rate increases planned until 2023.
- As for any tapering of bond purchases, he spoke directly to the bond bears, “As we approach it, well in advance, we will give a signal”. He couldn’t have been clearer unless he executed an order to buy another $100B in treasuries right there at the press conference.
- Social message? Powell reiterated that the Fed is willing to let inflation (as defined by the PCE) to run at “above 2%” for an “extended period, to get to full employment. At the same time, he noted the racial disparity in employment and the share of displaced jobs during the pandemic. This is a departure from the “old school” Fed targets of “2 and 5” (ie. don’t raise rates until inflation is above 2% and/or unemployment is below 5%). Inflation is seen as so much less volatile than historically. He seems to be following the “K shaped” recovery theory, with upper and lower classes on different paths. The Fed is determined to let the slack in employment and wages fully recover before making any policy moves. He basically instructed the bond market not to sell off every time a “transitory” inflationary data point is released. The 10-year held at about 1.65% with no major spike in yields. The only bazooka left in Powell’s arsenal would be a repeat of “Operation Twist” whereby the Fed sells short term treasuries (3 month – 2 years) and buys large amounts of 10-year Treasuries. We shall see if that becomes necessary.
Focus on Retail and the Reopening of Society: This week’s announcements of the reopening of movie theaters and gyms in California, along with partial capacity openings of Dodger Stadium, Angel Stadium, Disneyland, etc. are further advances in the reopening of society. CMBS lenders are open for business for well-performing retail properties and even some hotels at the right basis. With the recent rally in CMBS bonds and relatively low treasuries, originators can price risk in retail with an attractive loan rate. This is significant as CMBS is the traditional permanent loan execution for retail. Their willingness to lend unlocks bridge and construction lending for the product type. Of course, everything depends on the path of the virus and fingers are crossed. By David R. Pascale, Jr. , Senior Vice President at George Smith