The Federal Reserve’s monetary policy-making committee will conclude its third meeting scheduled since the start of the pandemic on Wednesday, amid concerns about the pace of recovery and uncertainty about Washington’s ability to reach agreement on a new fiscal stimulus package.
Here are five things to keep in mind when the Federal Open Market Committee releases its statement, and at the subsequent press conference by Jay Powell, president of the United States central bank.
The virus has damaged the recovery, but for how much?
The Fed warned that the United States’ recovery depends on the trajectory of the virus, and further increases in Covid-19 across the country in the past two months have slowed the economic rebound. Based on high-frequency data on employment and mobility, senior Fed officials have expressed concern about the downward shift in the economy this summer.
Powell and the FOMC can say more about whether they see this as a pause on a gradual path to better economic health, or a reversal that could lead to further damage in the form of permanent business closings and job losses.
Powell can emphasize the importance of Americans following the guidelines of US health officials, particularly in the use of masks, as the key to fighting the virus and helping the economy.
The Fed is preparing to strengthen its monetary support, but how and when?
The FOMC is not expected to make any major changes to its policy statement. Interest rates are expected to remain close to zero for the foreseeable future, and the Fed is likely to reaffirm its commitment to use all of its tools to sustain the recovery.
But the United States central bank, particularly through Powell’s press conference, can offer more information on his next steps.
The minutes of the June meeting showed growing support among Fed officials for a more explicit form of forward-looking guidance on the path of policy rates, to reinforce their ultra-easy monetary policy stance.
Possibilities include linking targeting to inflation outcomes or unemployment rate. Powell can provide an update on the status of such discussions and whether there is consensus on the best option.
Beyond specific policy tools, Priya Misra, global head of rate strategy for TD Securities, said it was important for the Fed to appear “very moderate” this week and send a clear message that there will be more political support soon.
“The Fed knows that the market will come into this meeting with expectations,” he said. “They need to feed him something.”
Can the Fed push Congress toward a fiscal deal?
Powell has been gently but unambiguously pressuring the White House and lawmakers on Capitol Hill to maintain fiscal support for the economy during the crisis, and the recent slowdown in recovery makes that aid even more crucial.
The FOMC meeting is taking place at a crucial juncture as lawmakers seek to agree on a new stimulus package that would include an extension of emergency unemployment benefits.
Democrats in the House of Representatives passed a $ 3 billion bill with $ 600 a week in improved unemployment benefits. The Republican-controlled Senate is considering a $ 1n plan with $ 200 a week in such assistance.
Powell will not want to appear overtly political. But given the urgency, he may be less sensitive than in the past about the dangers of withdrawing fiscal support at this stage, and he could argue that a large package is necessary.
Will the Fed adjust the terms of your bond buying binge?
A key pillar of the Fed’s crisis-fighting strategy has been its promise to buy an unlimited amount of public debt.
In the worst of the market turmoil, the Fed was buying Treasuries of all maturities at a rate of $ 75 billion a day. It gradually reduced the size of its purchases once market conditions began to stabilize. Now the central bank is buying at a monthly rate of $ 80 billion.
Strategists believe the Fed will need to shift its approach to buying bonds, directing most of its purchases to longer-term Treasuries. They note that the Treasury has increased the issue to finance the record relief packages enacted to limit the economic damage caused by the outbreak.
The central bank does not appear ready to announce a more structured asset purchase plan with fixed bond purchase amounts. That is likely to happen only if the economic outlook becomes clearer.
Nor does it appear likely that the Fed will soon establish control of the yield curve, implying that the central bank sets targets for Treasury yields and buys and sells as many stocks as necessary to maintain those levels.
Kathy Jones, chief fixed income strategist at Charles Schwab, said such a policy may not be necessary yet, as Treasury yields remain near record lows.
Will the Fed signal any changes to its loan facilities?
On Tuesday, the Fed moved to avoid its own “credit cliff,” as JPMorgan economist Michael Feroli described it, by extending the duration of its emergency loan plans from late September to the end of the year.
The move was not a surprise, as Fed officials had indicated they would keep the multi-billion dollar schemes in place as long as the crisis persisted, even if they were not overused. However, he indicated how concerned the Fed is with the lingering economic crisis and the possible turmoil in financial markets in the fall.
The big question about facilities is not so much how long they will last, but whether they are enough to help those in need, particularly medium-sized businesses and struggling state and local governments. The Fed has faced criticism that the lending criteria are too strict, and may have to make the terms more generous, especially if the crisis deepens.
