Five things to watch from the Federal Reserve meeting

The Federal Reserve’s monetary policymaking committee will wrap up its third scheduled meeting since the start of the pandemic on Wednesday, against a backdrop of concerns about the pace of recovery and uncertainty about Washington’s ability to strike a deal on a new fiscal stimulus package.

Here are five things to watch when the Federal Open Market Committee releases its statement, and in the ensuing news conference by Jay Powell, the chairman of the US central bank. 

The virus has hurt the recovery, but by how much?

The Fed has warned that the US recovery depends on the trajectory of the virus, and new surges of Covid-19 across the country over the past two months have slowed down the economic rebound. Based on high-frequency data on employment and mobility, senior Fed officials have expressed concern about the downshift in the economy this summer.

Mr Powell and the FOMC may say more about whether they see this as a pause on a gradual path to better economic health, or a reversal that could deliver greater damage in the form of permanent business closures and job losses.

Mr Powell may emphasise the importance for Americans to follow the guidelines of US health officials, particularly on mask wearing, as key to fighting the virus and helping the economy. 

The Fed is preparing to reinforce its monetary support, but how and when?

The FOMC is not expected to make any big changes to its policy statement. Interest rates are expected to stay close to zero for the foreseeable future and the Fed is likely to restate its commitment to using all its tools to sustain the recovery.

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But the US central bank, particularly through Mr Powell’s press conference, may offer more insight into its next steps.

Minutes from the June meeting showed growing support among Fed officials for a more explicit form of forward guidance for the path of policy rates — to reinforce its ultra-easy monetary policy stance.

Possibilities include tying forward guidance to inflation outcomes or the unemployment rate. Mr Powell may provide an update on the status of such discussions, and whether there is a consensus on the best option.

Beyond specific policy tools, Priya Misra, global head of rates strategy at TD Securities, said it was important for the Fed to sound “very dovish” this week and send a clear message that more policy support is coming soon.

“The Fed knows that the market is going into this meeting with expectations,” she said. “They need to feed it with something.”

Can the Fed nudge Congress towards a fiscal deal? 

Mr Powell has delicately but unambiguously been pushing the White House and lawmakers on Capitol Hill to maintain fiscal support for the economy throughout the crisis, and the recent slowdown in the recovery makes that help even more crucial. 

The FOMC meeting is happening at a pivotal juncture, as lawmakers attempt to strike an agreement on a new stimulus package that would include an extension of emergency unemployment benefits.

Democrats in the House of Representatives have passed a $3tn bill with $600 a week in enhanced jobless benefits. The Republican-controlled Senate is considering a $1n plan with $200 a week in such assistance.

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Mr Powell will not want to seem overtly political. But given the urgency, he may be less delicate than he has in the past about the dangers of withdrawing fiscal support at this stage, and he could make the case that a large package is necessary. 

Will the Fed adjust the terms of its bond-buying binge?

A key pillar of the Fed’s crisis-fighting strategy has been its pledge to buy an unlimited quantity of government debt.

At the worst of the market turmoil, the Fed was buying US Treasuries of all maturities at a pace of $75bn per day. It gradually scaled back the size of its purchases once market conditions began to stabilise. Now, the central bank is buying at a monthly rate of $80bn.

Strategists believe the Fed will need to shift its bond buying approach, directing the bulk of its purchases to longer-dated Treasury bonds. They note the Treasury has increased issuance to fund the record relief packages enacted to limit the economic damage caused by the outbreak.

The central bank does not seem ready to announce a more structured asset purchase plan with fixed amounts of bond-buying. That is only likely to come if and when the economic outlook becomes clearer. 

Neither does it seem likely the Fed will soon institute yield curve control, which involves the central bank setting targets for Treasury yields and buying and selling as many securities as needed to maintain those levels.

Kathy Jones, chief fixed-income strategist at Charles Schwab, said such a policy may not be needed yet, given that Treasury yields remain close to record lows. 

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Will the Fed signal any changes to its lending facilities?

On Tuesday, the Fed moved to avert its own “credit cliff”, as JPMorgan economist Michael Feroli described it, by extending the duration of its emergency lending plans from the end of September until the end of the year. 

The move was not a surprise, since Fed officials had indicated they would keep the multibillion-dollar schemes in place as long as the crisis persisted, even if they were not being used much. However, it indicated how concerned the Fed remains about persistent economic distress and potential financial market turmoil heading into the autumn.

The big question about the facilities is not so much how long they will last, but whether they are sufficient to help the needy, particularly midsized businesses and troubled state and local governments. The Fed has faced criticism that the loan criteria are too stringent, and it may have to make the terms more generous, especially if the crisis deepens.

Balance sheet forecasts have fallen about $1tn



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