[ad_1]
After an emergency meeting of Federal Reserve policymakers in mid-March, President Jay Powell expressed confidence in the central bank’s ability to protect the American economy from the most devastating consequences of the coronavirus pandemic.
“We believe we have a lot of political space left, a lot of power in our tools,” he told reporters.
Six weeks later, the Fed has deployed more firepower than in 2008, including asset purchases, expanded credit facilities, and lines of exchange with foreign central banks. However, the economic outlook remains unclear, with 26 million Americans who have filed claims for unemployment benefits.
Here are five things to watch as the Fed chairman and other members of the Federal Open Market Committee meet Tuesday and Wednesday, this time for a regularly scheduled meeting.
Powell still optimistic about the second half?
Given the unprecedented situation facing the central bank when the coronavirus spread across the United States last month, Fed officials declined to provide their usual economic forecasts at their last FOMC meeting.
Recommended
Powell offered a glimpse of what he expected in an interview with NBC television in late March, saying that production will likely decrease substantially in the second quarter before recovering in the second half of the year.
Although the Fed will not release formal projections until June, financial markets will be on the lookout for whether Powell still expects a rebound in the second half, given the drop in oil prices and other economic consequences of the pandemic in recent weeks. Furthermore, Powell has suggested that the virus must be under control before the economy can reopen, so any updates on his thinking will be important.
Any new guidance on rates?
In March, the FOMC said it would keep US interest rates close to zero until officials were “confident that the economy has withstood recent events and is on track to meet its maximum employment and price stability targets.” .
Powell has ruled out negative rates for now, saying they would not be appropriate for the United States, so the question is whether the Fed will want to reaffirm or clarify that statement. A move towards a very specific forward orientation, for example, linking zero interest rates to a certain level of unemployment or inflation, might be too much to ask, but any step in that direction, or an indication of internal debate on the subject, it would be significant.
Some economists have suggested that the Fed may modify the interest it pays on excess reserves from its current level of 10 basis points, but that would be more of a technical change than a policy change.
Will there be more decline?
On March 23, the Fed raised the limit on the amount of US Treasury bills. USA And mortgage-backed securities it would buy, after a commitment to buy at least $ 700 billion proved insufficient to address tensions in both markets.
For weeks, the Fed bought at a rate of $ 75 billion in Treasury bonds per day, helping to expand its balance sheet to more than $ 6 trillion. Since then, it has slowed its purchases as trading conditions in the world’s largest government debt market have stabilized and the disruptive price swings observed in March have decreased.
The New York central bank arm now buys an average of $ 10 billion in Treasury bonds each day, or roughly $ 50 billion for the week ending May 1. That is still a significant sum, but a marked decrease from previous levels.
Investors want more clarity on the Fed’s appetite. The central bank has suggested that it will adjust its programs according to market conditions, so few investors see the Federal Reserve end its interventions entirely as long as the coronavirus outbreak.
“The Fed is shrinking because market performance has improved,” said Michael Gapen, chief economist at Barclays in New York. “If the functioning of the market somehow deteriorates, those purchases could increase again.”
Any adjustments to the credit plans?
As financial markets convulsed last month, the Fed introduced a series of emergency measures to alleviate stress in most asset classes, including facilities to support the $ 1.1 trillion commercial paper market, used by companies to raise short-term cash as well as market corporate debt.
The Federal Reserve’s historic decision to support riskier issuers by buying junk-traded funds came along with an unprecedented promise to buy up to $ 500 billion of short-term debt directly from the US states. . USA And some counties and cities.
Recommended
The central bank expanded the scope of its municipal bond line this week, but investors do not expect additional changes in any of the programs proposed at the meeting. Instead, they think the Fed will focus on putting all facilities into operation, as only a few are operational so far.
Andrew Hunter, a US economist at Capital Economics, sees this meeting as an opportunity for the Federal Reserve to “evaluate” its efforts to date, rather than deploy additional support.
Is there a message for Congress?
Fed officials have consistently pointed out that during a time of economic duress, the fiscal response is as important as monetary policy, and they have pointed to both leaders of Congress and the White House.
But now that multiple stimulus rounds have been agreed, totaling more than $ 3 trillion, the calculation for the Federal Reserve could start to get more complicated. There is almost certainly a case for more fiscal support, but there are also emerging concerns about the US fiscal position. Given the wave of spending unfolding in the crisis era, Powell may want to tackle.
