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Members of D.A. Davidson & Co.

Fed Released the Minutes of its July 28-29 Meeting

"The Fed released the minutes of its July 28-29 meeting. ...“Many participants judged that yield caps and targets were not warranted in the current environment but should remain an option.” Financial markets have been building in the idea that the Fed was going to engage in financial repression.  Specifically, the expected policy mix was fixing interest rates across the yield curve, a slow reaction to rising inflation and continued policy accommodation. This has led to low Treasury yields, higher gold and equity prices and narrowing credit spreads. As the above quote indicates, there was a surprising degree of reluctance to embrace the idea. Some of this hesitancy was due to the lack of upward pressure on interest rates (of course, part of the low rate situation is due to market expectations of yield curve control). It was a decided minority (“a couple of participants”) who seemed to express support for the idea. It won’t really be tested until rates rise. But, in the end, it appears the FOMC is in a “wait and see mode,” keeping current policy in place but seems unlikely to add additional stimulus unless there is a decided decline in economic activity. This is not what financial markets wanted to hear. Our take is that Chair Powell is supportive of the concept of yield curve control, but the lack of support suggests the rest of the FOMC isn’t on board yet. At the same time, we think the market’s assessment of the Fed’s future policy is correct; financial repression is likely."


(Daily Comment dated August 20, 2020 by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez of Confluence Investment Management)


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