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Federal Reserve Chairman Jerome Powell speaks to journalists after the Federal Reserve cut interest rates in an emergency move designed to protect the world’s largest economy from the impact of the coronavirus, during a press conference in Washington on March 3, 2020.
Kevin Lamarque | Reuters
After unleashing the most aggressive programs to support the markets and the economy in its history, the Federal Reserve is likely to halt any further initiatives until it has more information about how those movements work and what’s to come.
However, that does not mean that central bank officials have no news at the store when they meet this week.
In the months since the coronavirus swept across the nation and the world, the Fed cut its benchmark interest rate to near zero and launched a variety of programs that also seek to bring money to the homes and businesses that need it.
Wall Street expects the Federal Reserve to control interest rates for the foreseeable future and continue to run its liquidity and loan programs for as long as it takes to get the U.S. economy back on track and financial markets to run smoothly.
Outside of that, he has another job to do, and some moves could be revealed when the Federal Open Market Committee concludes its meeting on Wednesday. On the agenda, according to economists and strategists, there could be more explicit guidance on how long rates will stay low, some adjustments to other rates to make sure the benchmark fund level is where it should be, and asset purchases. aimed at lowering more. forward rates.
This week’s meeting “comes after what has been the most active and condensed period of Fed policymaking in its history,” Lewis Alexander, the chief US economist at Nomura, said in a note. “Given how much the Federal Reserve has already done, we do not expect major innovations in Federal Reserve policy … Regarding the path of short-term rates, we expect the FOMC to reiterate that they hope to maintain their targets at levels current in the immediate future. ” “
Still, Alexander expects some adjustments.
On the one hand, he believes the committee will claim that it is slowing down its asset purchases from the dizzying pace of late March and early April. The Fed expanded an existing program where it was buying Treasuries and mortgage-backed securities into an open trade, raising its balance sheet to $ 6.6 trillion, a 54% increase in just seven weeks. However, the Fed has already slowed purchases in recent weeks as market performance has improved.
Possible speed movements
The Fed will not change its current federal funds interest rate target from 0% to 0.25%. But it could adjust the rate, currently 0.1%, which pays in excess of reserves that banks store at the Fed.
That would be a technical adjustment aimed at raising the fund rate from the 0.05% level where it has been traded since early April. Ideally, the Fed likes to keep the rate around the midpoint of the target range.
The FOMC could also affirm what it calls “advanced guidance,” or a commitment not to raise rates until certain metrics are seen, particularly considering employment and inflation. However, Federal Reserve watchers expect something more formal to be released at a later meeting, with this month’s commitment more generic.
“We hope the statement will adjust, perhaps to say that rates will be low until the recovery is ‘underway’ and the committee is ‘confident’ that its dual mandate will be achieved,” wrote Citigroup economist Andrew Hollenhorst. “At some point, perhaps in late summer, we expect the Fed to explicitly commit to keeping rates low until inflation reaches or exceeds 2% for a sustained period … However, with rates already low and much uncertainty to resolve in future months, we see little reason for the Fed to announce this at the April meeting. “
There is also a possibility that the Fed will announce or discuss an effort to buy more bonds further down the yield curve in an effort to cut rates in the long term. Known as “performance curve control,” such an effort was under discussion even before the coronavirus hit.
More broadly, Wall Street seeks language from the Federal Reserve that recognizes the damage done to the economy and the central bank’s determination to maintain an accommodative policy.
“The Committee’s statement will have to take into account the dramatic deterioration in the economy since the last meeting in March,” said Goldman Sachs economists. “The Committee’s April statement will have to take into account this dramatic deterioration in the economy. We hope the statement takes into account that economic activity has ‘contracted sharply’, to take stock of the historic increase in layoffs and to recognize that household spending and business investment “has declined sharply.”
Goldman expects less activity at the meeting than some of his Wall Street counterparts.
The firm’s economists see President Jerome Powell during his post-meeting press conference stating that “officials are happy” with the current policy measures. Consequently, they now forecast that the Fed will not raise rates until the end of 2023.
