MNI EXCLUSIVE: Fed May Surprise With Stronger Forward Guidance

By Jean Yung and Pedro Nicolaci da Costa 

     WASHINGTON (MNI) - The Fed could surprise markets next week by

strengthening its promise to keep policy accommodative over the foreseeable

future, former officials told MNI.

     Beefed up forward rates guidance could include stronger language or go as

far as setting targets for unemployment and inflation or more specific timing,

they said. That could be buttressed by caps on short-term bond yields later in

the year. Officials could also commit to deploying the full extent of its policy

arsenal like bond buys and credit facilities until the economy has fully healed

from the coronavirus pandemic.

     "If you think about forward guidance as most potent when there is a lot of

uncertainty and a lot of economic distress, then it would be logical that they

would roll that out now and not wait," former Atlanta Fed President Dennis

Lockhart told MNI. "They have an opportunity to put a little bit more oomph

behind what they've been doing by using forward guidance."

     Seamus Brown, a former New York Fed economist now at Moore Capital

Management, told MNI he disagrees with the market view the Fed has done so much

it's likely to take a breather. The FOMC instead could come to embrace stronger

guidance while they are slashing the economic outlook, Brown said.

     "The question for April is do they go back to monetary policy," he said.

"They have had some time and at the speed at which they've been moving -- I'm

more open to the possibility" of new action, Brown said.

     --ON TRACK?

     The Fed should at least adjust tepid language saying it will wait until the

economy is "on track" before raising rates, he said. The U.S. jobless rate may

already effectively be 20% due to health shutdowns, meaning "the jobless rate

could fall to 18% and you'd be 'on track,'" he said.

     The FOMC said March 15 it would maintain the target range at 0% to 0.25%

until "it is confident that the economy has weathered recent events and is on

track to achieve its maximum employment and price stability goals."

     The Fed is likely to further explore adopting caps at the front end of the

yield curve later this year, former Fed officials have told MNI, though its

dubious power to boost the economy leaves it off the table as an option for now.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta.ext@marketnews.com

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