MNI POLICY: Fed Minutes Eye More Stimulus in Weak Recovery

Fed officials thought additional stimulus such as stronger forward guidance may be needed to counter a Covid-19 recession that was creating risks in the financial system, according to minutes from the Fed's July meeting published Wednesday.

"Several participants suggested that additional accommodation could be required to promote economic recovery and return inflation to the Committee's 2% objective," the minutes said.

For the first time since the start of the pandemic, Fed officials also started to voice concerns about the prospects that financial stability might be disrupted in a deeper downturn. "A number of participants commented on various potential risks to financial stability," the report said.

"Banks and other financial institutions could come under significant stress, particularly if one of the more adverse scenarios regarding the spread of the virus and its effects on economic activity was realized."

The Fed is also worried nonbank financial firms had high levels of debt going into the pandemic, "increasing their risk of insolvency."

Forward Guidance

Policymakers also spent much of the meeting laying the groundwork for two key upcoming policy shifts: an announcement about a change in framework, likely toward an average inflation target, and additional forward guidance on the future path of monetary policy.

The framework review now looks likely to be announced as early as the September meeting, with the minutes saying "it would be important to finalize all changes to the statement in the near future."

Forward guidance could either be tied to economic outcomes or a calendar date, the minutes suggested, but the timing of any announcement on that front was less certain.

That's in part because guidance is seen as a way to boost a recovery that's already taking place -- and the economy no longer appears in recovery mode at the moment.

"A number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point," the Fed said.

Long Recovery

In addition, the minutes showed another wide-ranging discussion about the issue of yield-curve targeting -- and it still appears to lack all but minimal support on the Federal Open Market Committee.

FOMC members also said "the labor market was a long way from a full recovery" and "a highly accommodative stance of monetary policy would likely be needed for some time to support aggregate demand and achieve 2 percent inflation over the longer run."