Fed Expands Municipal Bond Purchases Ahead of FOMC Meeting

'No Specific Message from FOMC' Expected, Sudden Announcement
Possibility of Proactive Guideline Presentation
Attention on Whether COVID-19 Economic Situation Will Be Assessed

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. financial sector is focusing on the message that the Federal Reserve (Fed) will release after the Federal Open Market Committee (FOMC) meeting scheduled for June 28-29.

This FOMC is the first to be held since the massive unemployment crisis caused by the novel coronavirus disease (COVID-19) in the U.S. economy, so it is expected that the Fed will reveal its outlook on the future economy and provide guidance on its future response. In this context, the Fed announced an expansion of municipal bond purchases on the day, reaffirming its commitment to fulfilling its role as the 'lender of last resort.'

According to CNBC and The Wall Street Journal (WSJ) on June 27 (local time), the consensus is that there will be no abrupt changes in monetary policy at this FOMC meeting. Since zero interest rates and unlimited quantitative easing measures have already been implemented, market expectations have also lowered. Given that the Fed has decided to purchase municipal bonds and even junk bonds, which were not used even during the global financial crisis, most of the available options have already been exposed. Nevertheless, Fed Chair Jerome Powell and the committee members have mentioned that the Fed still has ammunition left.

Wall Street is primarily expecting hints on how the Fed diagnoses the current economic situation and how it will continue its monetary policy going forward. Rather than specific actions, Wall Street evaluates that a preemptive guideline on how long the current zero interest rate will be maintained could be presented.

Louis Alexander, an economist at Nomura Securities, said, "This meeting is held immediately after the most dynamic and compressed policy decisions in Fed history," and predicted, "The Fed will mention that it will maintain the target federal funds rate at the current level for a considerable period."

Andrew Hollenhorst, an economist at Citigroup, said, "It is expected that the Fed will mention maintaining the current interest rate level until the economy sufficiently recovers," and added, "It will likely show confidence that the effects of rate cuts and asset purchases will work well."

It is also an important concern what judgment the Fed will make about the current economic situation. With 26 million new unemployed people over five weeks of unemployment crisis, the market's reaction could vary depending on the central bank's economic outlook direction.

Meanwhile, the Fed announced additional measures ahead of the FOMC. It decided to expand the scope of municipal bond purchases to support local governments facing fiscal crises due to COVID-19.

The Fed's existing municipal bond purchase targets were bonds issued by counties with populations over 2 million and cities with populations over 1 million, but this has been expanded to counties with populations over 500,000 and cities with populations over 250,000. As a result, 261 local governments including states, cities, and counties in the U.S. will benefit.

However, there is also criticism of the Fed's active response to COVID-19. WSJ introduced the argument of Howard Marks, chairman of Oaktree Capital, who said, "Capitalism without bankruptcy is like Catholicism without hell."