MNI EXCLUSIVE: Extra Fed Guidance May Be Delayed Till Year-End

--Fed May Wait Until End-2020 Before Detailing Guidance

--Uncertain Outlook Might Force Delay, Former Officials Tell MNI

By Pedro da Costa and Jean Yung

     WASHINGTON(MNI) - Federal Reserve officials may need to wait until the end

of this year to deliver greater clarity on just how long they expect to keep

easing monetary policy, as the ruling Republicans struggle to reach a deal over

the next U.S. fiscal aid package and the coronavirus case count eclipses 4

million, former Fed officials told MNI.

     Such a delay, driven by a renewed deterioration in the economy that has

upended early forecasts for a fairly rapid rebound from the Covid-19-led

recession, might disappoint market expectations for additional forward guidance

to be announced at the Fed's September meeting.

     "It's a particularly challenging time to lay down markers as to how to

operate in the future or what to expect from monetary policy, which is so

dependent on the trajectory of the epidemic and fiscal action," former Atlanta

Fed President Dennis Lockhart said in an interview.

     "September could turn out to be too early because the air just hasn't

cleared enough."

     Republicans on Thursday were forced to push back the release of their own

proposal for a USD1 trillion aid package amid infighting. Democrats want USD3.5

trillion in relief. Enhanced unemployment benefits for millions of Americans end

next week unless lawmakers and the White House strike a deal, just as initial

jobless claims rebounded this week for the first time since April.

     --RECOVERY FARTHER OFF

     Delaying forward guidance, which the Fed sees as a key tool in stimulating

the economy, would buy time for officials to reassess a now-darker economic

outlook and determine when to use monetary policy to maximum effect, sources

told MNI.

     "Forward guidance is a form of policy that is meant to have a stimulative

effect, and guidance would be most efficacious when the committee is relatively

sure we are on a recovery path and the economy is not going to be buffeted in

any major way by public health ups and downs," Lockhart said. It "is not

something for just supporting an early rebound from a shock."

     Promises on how long asset purchases would continue and rates will remain

at zero would only deliver limited stimulus when expectations about a recovery

begin pushing Treasury bond yields higher.

     "What does forward guidance get you when the market already expects you not

to raise rates any time soon?" Julia Coronado, a former Fed board economist,

told MNI.

     "This recalibration through this fine tuning of forward guidance was always

described as something they would do once they gained clarity on the recovery,"

she said. "We don't have clarity."

     --LENDING FACILITIES

     Beyond the likely extension of corporate, municipal and Main Street credit

lending facilities the Fed launched in response to market disruption in March,

ex-officials do not expect major moves at next week's FOMC meeting.

     Instead, they think the Fed will wait until at least September to unveil

its policy framework review, which has been over a year in the making and is

expected to move the central bank from a 2% inflation target to something closer

to an average inflation target. Delivering a framework shift and forward

guidance at the same meeting could confuse markets and muddle the Fed's

messaging, some sources told MNI.

     In the meantime, sources say the Fed's thus far scantily-used credit

facilities will see ramped up demand as an economy placed in suspended animation

through widespread forbearance arrangements is hit by a wave of consumer and

corporate bankruptcies.

     By that time, conditions might have deteriorated to such a degree that the

guidance needs to be even more robust than investors currently expect so as to

deliver the stimulus and confidence needed to ensure a smooth recovery.

     "It's a noisy time to try to use forward guidance," Joseph Haslag, who

spent 12 years at the Dallas Fed, told MNI. "It's too noisy for the directive

and for any kind of forward guidance that comes out of that to be effective.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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