The Federal Open Market Commission raised concerns at its recent meeting on the future of the economy, saying the coronavirus is likely to continue to stunt growth and pose potential dangers to the financial system.
At the July 28-29 session, the Federal Reserve’s policy-making arm voted to keep short-term interest rates anchored close to zero, citing an economy that is briefly falling its pre-pandemic levels.
Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation over the long term and pose many risks to the economic outlook over the medium term,” the summary of the meeting.
Comments further indicated that although members advocated adding clarity to their expectations for when they would raise rates again, they appeared to reject the opportunity of bond purchases to control yields on government bonds.
Shares posted some gains after the release of the minutes, while yields were lower and the US dollar up.
Because of the impact the virus will have on the economy, FOMC members have expected them to keep their current lending rate overnight to a range of 0% -0.25% until they ‘trust that the economy has processed the recent events and was to follow to achieve the maximum goals of employment and price stability. “
U.S. gross domestic product tumbled at a rate of 32.9% in the second quarter as the pandemic shut down most non-essential activities. A return to growth is expected in the third quarter, although a surge in the virus raises some doubts about how aggressive the bounceback may be.
Along with concerns about overall growth, members said they were concerned about risks to the financial system.
Although President Jerome Powell and other Fed officials have repeatedly said that banks and relevant institutions are generally in strong shape, committee members said at the meeting that they were concerned that this could change as the spread of the viruses persists and gets “more negative” scenarios about the future.
Officials also expressed concern about growing levels of public debt.
The federal government is now $ 26.6 trillion in debt, a gain of more than $ 3 trillion during the pandemic when Congress and the White House rushed to get help for those affected by the economic shutdown. This coincides with an impetus to Treasury’s market and raises concerns that the high level of spending “may have implications for the functioning of the market.”
Yield curve control, guidance also discussed
In addition to looking for the reasons behind the policy decisions, investors were focused on all indications about improved ‘forward performance’, such as the parameters for future rate action, and the ability to use bond purchases to control government bond yields.
On the issue of revenue caps, officials remained skeptical about their usefulness.
“Of those participants who discussed this option, most judged that revenue caps and targets would likely provide only modest benefits in the current environment, as the Commission’s advance regarding the path of the federal fund rate is already very credible. and longer interest rates appeared were already low, “the minutes said.
Forwarding forward, though, could be upgraded at some point.
Members indicated that “at some point would provide more caution about the likely path of the target range for the rate of federal funds.”
The form that can take would be “outcome based”, or aimed at achieving specific goals before moving rates. The Fed’s mandate is now for “full employment and price stability”, but on outcome-based forecasting would add specific targets on unemployment levels and inflation.
Members also discussed making decisions based on a specific calendar date, perhaps in line with the goals of the mandate. However, the minutes provide no timeline for when forward guidance would take root.
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