FOMC to Debate Clarifying Rates Path, QE: Decision-Day Guide
The FOMC is all but certain to keep its benchmark overnight rate unchanged.
(Bloomberg) -- Confronting signs that the U.S. economy may be losing momentum, Federal Reserve policy makers will turn their attention to how to jumpstart a stronger rebound from the virus-induced recession.
The Federal Open Market Committee is all but certain to keep its benchmark overnight rate in a target range of 0% to 0.25%, where it’s been since March 15 to help soften the pandemic’s blow. The committee will release a statement at 2 p.m. and Chair Jerome Powell will hold a press conference 30 minutes later. Quarterly forecasts are not due to be updated at this meeting.
The committee will discuss changes in its forward guidance for interest rates and asset purchases, as well as its framework for monetary policy decisions, though it’s probably not ready to release final decisions. With data from unemployment claims to credit-card spending and air travel plateauing in July, Powell is expected to reinforce his message that the Fed will do whatever it can to support the recovery, while repeating a call for fiscal aid from Congress.
“Since the last meeting, the Covid situation has gotten worse and perhaps even more uncertain,” said Dan North, a senior economist with Euler Hermes North America. “There will be a repetition of the posture the Fed has taken, which is ‘we are all-in, we are here with as much as it takes for as long as it takes.’”
Forward Guidance
The Fed has discussed linking its rate path to reaching -- or overshooting -- its 2% inflation goal or to an unemployment rate objective, in a variation of the thresholds it deployed in 2012. While economists surveyed by Bloomberg News look for that to happen in September, there’s a chance the FOMC could move up its plan in response to recent disappointing data.
“The Powell Fed has surprised by moving sooner and more aggressively than many expected,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “We really can’t afford any delays given the magnitude of the humanitarian crisis that we are facing. That could push the Fed to move sooner.”
What Bloomberg Economists Say
“Bloomberg Economics does not anticipate major new actions from the Federal Reserve at the July FOMC meeting. Behind the scenes, there will be intense deliberations on how best to provide explicit forward guidance about the path of the federal funds rate and asset purchases. Expect Fed Chair Jerome Powell to be asked more about this in the press conference.”
--Andrew Husby, Eliza Winger and Yelena Shulyatyeva
Yield-Curve Control
Fed officials have repeatedly suggested they are not close to targeting rates on Treasuries, a framework known as yield-curve control, with Powell in June saying study about it was “an early-stage thing.” Economists surveyed by Bloomberg this month no longer expected it to be adopted.
FOMC Statement
The statement is likely to be similar to the June 10 missive, when the FOMC said it’s committed to using its “full range of tools” to support growth in the face of an outbreak that will continue to “weigh heavily on economic activity,” jobs and inflation, and pose “considerable risks” to the outlook. The first paragraph may note the deterioration in data for July, with the resurgence in the virus that’s hit parts of the U.S.
“The statement may well refer to renewed weakness in high-frequency consumer spending and labor-market indicators, and perhaps also to the rising cases and deaths from the virus,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist.
Balance Sheet
The Fed has maintained purchases of Treasuries and mortgage-backed securities “at least at the current pace” to ensure smooth market functioning. Analysts say the Fed is likely at some point -- possibly this month -- to reformulate the program along the lines of its large-scale bond buying from 2008 to 2014 to explicitly stimulate economic activity, known as quantitative easing, or QE.
“The committee will likely debate ways to provide additional accommodation through the Fed’s balance-sheet policies” and shift its focus to economic support, though that’s more likely to be a September decision, Nomura Securities International Inc. Chief U.S. Economist Lewis Alexander wrote in a report.
Press Conference
Powell could provide an update on the FOMC’s thinking about forward guidance as well as its yearlong review of its framework for monetary policy. The committee has held listening meetings called Fed Listens with businesses and labor leaders and sought to consider new approaches to meeting its mandates for price stability and full employment. One idea that has some support is an average 2% inflation goal that would allow for overshooting to make up for past misses on the low side.
In addition, the chairman, who has shied away from offering specifics on fiscal policy, is likely to repeat his general endorsement of spending to aid the recovery, and to argue that this isn’t the time to worry about containing the federal debt. Republicans and Democrats have just started talks this week on a package expected to be at least $1 trillion to maintain fiscal support expiring from previous initiatives.
He could also be asked about the disproportionate impact of the current crisis on minorities, with Black unemployment rising more rapidly than the overall jobless rate. A proposal by economists Jared Bernstein and Janelle Jones has urged the Fed to target the African American unemployment rate when it makes policy decisions.
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