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Free AccessMNI 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
[TOPICS: M$U$$$,MT$$$$,M$$CR$,M$$FI$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.