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The Fed's Roadmap

Scott Minerd profile picture
Scott Minerd


  • Economic output will remain below potential for years to come as we deal with the pandemic and its long-term scarring effects.
  • Absent further action by the Fed, this deluge of Treasury securities will likely start pushing interest rates higher. The Fed cannot allow this to happen.
  • Fast-forward a decade into the future and I foresee that we may be shocked at what is considered sound central bank policy.

The Federal Reserve will face numerous challenges in the months and years ahead. Economic output will remain below potential for years to come as we deal with the pandemic and its long-term scarring effects. An additional challenge will be a U.S. federal government budget deficit that will exceed $3 trillion this year with significant likelihood that it could be larger. Absent further action by the Fed, this deluge of Treasury securities will likely start pushing interest rates higher, threatening the overall economic expansion. The Fed cannot allow this to happen. As I gaze into my crystal ball, the Fed's roadmap is likely to include the following progression of policy tools as the economy remains mired in a protracted downturn:

Extended forward guidance: The first and most likely policy option will be to announce a lengthy period of forward guidance. Forward guidance is nothing more than the Fed saying it does not expect to raise interest rates for a period of time. Given the current situation, forward guidance will have to be aggressive. With the market already pricing rates staying very close to the zero bound for the next five years, there is not going to be very much shock and awe if the Fed announces that it will keep interest rates at zero for two or three years. Currently the two-year Treasury note is yielding 21 basis points (and got as low as 11 points on May 8), and the five-year note is at 46 basis points. Pegging the overnight rate at zero would have a limited effect on reducing rates at the front end of the yield curve.

To make sure that longer-term interest rates stay in a range that provides greater support to the U.S. economy and financing the U.S. Treasury, the Fed will have to provide forward guidance that zero

This article was written by

Scott Minerd profile picture
As Chairman of Guggenheim Investments and Global Chief Investment Officer, Mr. Minerd guides the Firm’s investment strategies and leads its research on global macroeconomics. Prior to joining Guggenheim Partners, Mr. Minerd was a managing director at Morgan Stanley and Credit Suisse. He is involved in leadership roles at a number of civically-minded organizations, including Cedars-Sinai Medical Center and Strategic Partners Among Nations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

Great summary of possibilities, Scott. Thanks very much.

“If the Fed needs to tame a severe credit crisis, it will have to find a way to prop up stocks and thereby maintain access to capital in a market other than the bond market. The Federal Reserve charter does not allow for the purchase of stocks, but the U.S. Treasury could establish a special purpose vehicle to buy stocks that the Federal Reserve could fund.”

This is a scam and anyone who suggests it is either an idiot, greedy, or both.
Scarlo profile picture
Yellen already suggested as much, didn't she?
Wez profile picture
"A decade ago, I spoke about unorthodox monetary policies such as QE and forward guidance. Today, these have become acceptable and permanent policy tools of the Fed. To conceive that these policies are now considered sound monetary orthodoxy would have been practically unthinkable. Fast-forward a decade into the future and I foresee that we may be shocked at what is considered sound central bank policy."

A truly terrifying thought and one that will cause us to lose our one world superpower status.
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