Federal Reserve Officials to Meet Amid US Election Uncertainty

Economists and investors are bracing for market volatility and potential disruptions to the economic recovery as the US election looms. Federal Reserve officials, who will meet later this week, are likely to consider shoring up financial markets if there is a contested or uncertain outcome, with some economists predicting the Fed will deliver "surge" asset purchases to contain any post-election disruptions. While no major monetary policy changes are expected at this week's Federal Open Market Committee meeting, Fed officials will be closely monitoring the impact of the recent rise in coronavirus cases and hospital admissions on the economy.

Key Takeaways:

• The Federal Reserve will meet in the immediate aftermath of the US election, giving them a chance to respond swiftly to any market turmoil from the vote.
• Economists say the Fed would consider shoring up financial markets if a contested or uncertain outcome caused severe disruptions, with Randall Kroszner stating the Fed "will certainly stand ready to try to provide liquidity, to ensure market functioning."
• Krishna Guha and Ernie Tedeschi predict the Fed will deliver "surge" asset purchases to "contain" any post-election disruptions to US Treasury and mortgage-backed securities markets.
• The Fed could also potentially beef up corporate debt purchases if needed, according to Guha and Tedeschi.
• Despite no big monetary policy changes expected at this week's FOMC meeting, Fed officials will continue discussions about providing more clarity on their asset purchases.
• The recent rise in coronavirus cases and hospital admissions has Fed officials deeply concerned about the impact on the economy.
• Some market participants believe the Fed must soon focus the bulk of its bond-buying on longer-term debt, or increase the aggregate size of its purchases, to insure against a destabilising rise in borrowing costs.
• JPMorgan Asset Management's Diana Amoa thinks the Fed is likely to hold off on this policy shift until clarity on the election's outcome and the magnitude of forthcoming fiscal stimulus is gained.

Statistics:

• The benchmark 10-year Treasury yield has climbed from below 0.7 per cent at the start of September to 0.85 per cent.
• The yield on the ultra-long 30-year note has edged 0.2 percentage points higher to 1.62 per cent over the same period.
• The Fed has been buying Treasury securities of all maturities at a pace of about $80 billion a month.
• The majority of Treasury auctions have gone smoothly, but a handful of disappointing results have kept investors on edge about the market's capacity to absorb record blocks of debt.

Sources:

• Randall Kroszner, a former Fed governor and deputy dean of the University of Chicago's business school
• Krishna Guha and Ernie Tedeschi, economists at Evercore ISI
• Marvin Loh, State Street Global Markets
• Diana Amoa, a fixed income portfolio manager at JPMorgan Asset Management