MNI POLICY: Fed Minutes Saw Highest Unemployment Since WWII

--FOMC Debated More Explicit Forward Guidance In April, Curve Control

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - Fed officials reported a glum economic outlook when they

gathered remotely last month because of Covid-19 and debated clearer forward

guidance and capping some Treasury yields, according to meeting minutes.

     As Fed members agreed to keep official interest rates at effectively zero

and ongoing support to the financial system, they noted the coronavirus outbreak

is "inducing sharp declines in economic activity and a surge in job losses."

     Some participants said forward guidance could be made more explicit and the

"committee could adopt outcome-based forward guidance" based on certain levels

of the unemployment rate or inflation."

     Over 33 million Americans have filed for first-time unemployment in recent

weeks, leading to a surge in financial distress and even discouraging Fed

officials from issuing their own quarterly economic forecasts.

     "With regard to the labor market, participants noted that incoming data

confirmed that an extreme decline in employment was under way," the minutes

said. "Participants expected that the unemployment rate would soon reach the

highest levels of the post-World War II period."

     --MARKET PAIN

     Policymakers during the economic lockdown have been resorting to more

complex scenario forecasting that by definition generates a wide range of

possible outcomes. Two top Fed officials have told MNI in the last week that

they don't foresee submitting official forecasts for the June meeting.

     "Participants discussed several alternative scenarios with regard to the

behavior of economic activity in the medium term that all seemed about equally

likely. These scenarios differed in the assumed length of the pandemic and the

consequent economic disruptions," the report said.

     The Fed is worried that a more prolonged public health crisis could deepen

the nature of the economic slump, raising the risks of additional financial

disruptions like the lack of Treasury market liquidity that prompted Fed

intervention in March.

     "Participants were concerned that banks could come under greater stress,

particularly if adverse scenarios for the spread of the pandemic and economic

activity were realized, and so this sector should be monitored carefully."

     Fed staff provided a "preliminary reading on potential emerging risks to

financial stability" amid the coronavirus pandemic, which identified "possible

vulnerabilities in mortgage servicers, insurance companies, and large, highly

leveraged financial intermediaries."

     --CAPPING YIELDS

     Treasury yields at short to medium-term maturities could be capped at

specified levels for a period of time, according to a "few participants" cited

in the minutes. 

     Fed officials also debated fiscal policy more than usual, a testament to

the sense that Congress' tools are simply more powerful under current

circumstances than monetary ones. Policymakers were heartened by the size and

speed of the USD2 trillion-plus fiscal package enacted in Congress. "Even

greater fiscal support may be necessary if the economic downturn persists," the

minutes said.

     The energy sector has been especially hard hit by the shock to demand and a

collapse in oil prices, and "some participants expressed concern that low energy

prices, if they were to persist, had the potential to create a wave of

bankruptcies in the energy sector," the minutes said.

     "In addition, the agricultural sector was under severe stress due to

falling prices for some farm commodities and pandemic-related disruptions, such

as the closing of some food processing plants."

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

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