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'Plenty of tricks up their sleeve': Here's what 4 experts think about the Fed's dismal economic forecast and extension of near-zero rates

'Plenty of tricks up their sleeve': Here's what 4 experts think about the Fed's dismal economic forecast and extension of near-zero rates
  • The Federal Reserve's extension of near-zero interest rates was largely expected, but statements from chairman Jerome Powell and new economic forecasts left experts plenty to digest.
  • Powell warned of a "long road" to labor-market recovery, while the central bank's first projections since December see historically low rates lasting through 2022.
  • Policymakers' cautious tone reminded investors of lasting economic risks and contributed to the stock market's biggest single-day drop since April.
  • Here's what four experts had to say about the policy moves and new central bank commentary.
  • Visit the Business Insider homepage for more stories.

The Federal Reserve's latest policy update came with few surprises, but cautious tones from chairman Jerome Powell and new economic projections gave experts plenty to pick apart.

The central bank elected to hold interest rates near zero on Wednesday following its two-day meeting. The Fed also pledged to take in at least $80 billion in Treasurys and $40 billion worth of mortgage-backed securities each month to further aid market functioning. Policymakers' first economic forecast since December projected historically low rates lasting through 2022 and unemployment falling to 5.5% over the same period.

"We have to be honest that it's a long road," Powell told reporters in a press conference. "It's going to take some time and we are going to be deploying our tools, all of our tools, in pursuit of those goals."

The gloomy estimates shocked investors on Wednesday and helped drag equities into their biggest decline since April. Investor optimism for a swift economic recovery helped push the S&P 500 and Nasdaq composite to fresh records in recent sessions. When it seemed as though nothing could shake stocks' bull run, the central bank's warnings dragged it to a halt.

Here's what four experts had to say about the Fed's announcement and economic projections.

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Bank of America: 'Underlying tone ... was one of caution'

Bank of America: 'Underlying tone ... was one of caution'
A person walks by the Federal Reserve on Saturday, April 25, 2020. Caroline Brehman/CQ-Roll Call/Getty Images

The Federal Open Market Committee struck an "appropriately dovish" tone following its June meeting, the team led by Michelle Meyer, US economist at Bank of America, wrote Wednesday. Powell made it clear that near-zero rates would remain well into the nation's economic recovery, and that additional policies such as yield-curve control are still under discussion.

The central bank's overall language was little changed after months of unprecedented action, the bank said. While Powell expressed some optimism around stimulus implementation, the greater tone was one of continued concern.

"The Fed did note that financial conditions have improved, in part due to policy measures, showing some improved sentiment as a result of the stimulus," the team wrote. "That said, the underlying tone of the statement and the press conference was one of caution."

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Thornburg Investment Management: 'Plenty of tricks up their sleeve'

Thornburg Investment Management: 'Plenty of tricks up their sleeve'
FILE PHOTO: Federal Reserve Chairman Jerome Powell testifies on Capitol Hill Reuters

Lon Erickson, portfolio manager at Thornburg Investment Management, also homed in on future policy speculation. The Fed has so far been adamant that negative rates aren't under consideration, but Erickson sees such action as a potential next step if the Fed decides to target a specific yield curve.

"The Fed has plenty of tricks up their sleeve if they need to dazzle the economy some more," he said. "Here's what investors should count on in near term: some form of yield curve control while negative rates remain on the shelf."

The portfolio manager characterized the rest of the meeting as a "nothing burger," noting the Fed's "wait-and-see" approach is likely the best strategy until new economic data reveals just how impactful and long-lasting the coronavirus' toll will be. The central bank "has no more visibility than the rest of us as to how the economy will heal," Erickson added.

Read more: Mark Minervini says he raked in a 33,554% return over 5 years using a simple stock-trading strategy. Here are his 7 secrets to 'superperformance.'

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University of Notre Dame economist: 'Strap in for the upcoming recession'

University of Notre Dame economist: 'Strap in for the upcoming recession'
The spread of the coronavirus disease (COVID-19), in Fayetteville Reuters

The central bank was "ahead of the curve" in spiking interest rates to the floor in March and its latest, smaller move is similarly clever, Jason Reed, economist and finance professor at the University of Notre Dame's Mendoza College of Business, said.

May's hugely positive jobs report lifted markets and backed up investors' hopes for a quick rebound. Yet Friday's release is a single data point, and monetary tightening based on just the jobs report could easily backfire.

"The Fed's guidance, like always, will be contingent on the economic data coming in. And for now, that data suggests we should strap in for the upcoming recession," Reed said.

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JPMorgan: 'Arguably the unemployment forecast looks optimistic'

JPMorgan: 'Arguably the unemployment forecast looks optimistic'
U.S. Federal Reserve Chairman Jerome Powell  speaks in Washington Reuters

The FOMC statement's similarity to past releases reveals continued wariness toward the economic backdrop, Michael Feroli, chief US economist at JPMorgan, said in a Wednesday note. With little new data to go off of, even the Fed's latest economic projections are debatable.

"Arguably the unemployment forecast looks optimistic relative to their GDP forecast, and the PCE inflation forecast looks optimistic relative to their unemployment forecast," Feroli said. "To be sure, Chair Powell did emphasize the unusual degree of uncertainty attending to these forecasts."

The central bank should implement either outcome-based or date-based forward guidance to ease the economy through its rebound, the economist added. Doing so can eliminate the need for new policy tools and additional relief spending.

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