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MNI PREVIEW: FOMC Faces Darkened Outlook, Preps Easing Plan

MNI PREVIEW: FOMC Faces Darkened Outlook, Preps Easing Plan
(MNI) WASHINGTON
WASHINGTON
The Fed will likely continue its current pace of QE and hold rates around zero Wednesday, with the outlook clouded by Congress debating renewed Covid-19 spending to the last minute, leaving investors hunting for clues on new tools like stronger forward guidance or the new policy framework due later this year.
Since the FOMC last convened in mid-June, the number of confirmed U.S. Covid-19 cases has shot up by another million, prompting reimposed shutdowns in large states including California and Texas.
Fed officials this month noted a leveling off in the recovery as the surge in cases held down consumer confidence. The first estimate of U.S. Q2 GDP on Thursday will unearth the depth of the recession, with markets expecting a record-shattering 34% annualized drop after a 5% decline in Q1, despite re-openings that began in late April.
Former top officials told MNI the Fed's plan to deliver greater clarity on how long it expects to keep easing monetary policy may be pushed back to later in the year as the path of the virus dashed earlier hopes for a rapid rebound.

FISCAL AID

Key to the Fed's calculus is the next fiscal aid package, still under debate in Congress as enhanced unemployment benefits for 32 million people end this week. Senate Republicans are due to present their proposal late Monday but it may be weeks before a deal is reached.
The July jobs report may see a loss in momentum after two months of rapid hiring. A real-time labor market index from the St. Louis Fed predicts a drop-off in job gains this month.
The Fed's thus far scantily-used credit facilities will likely be extended and see ramped up demand as an economy placed in suspended animation through 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 Fed's guidance needs to be even more robust than investors currently expect.

"The recovery likely will face headwinds for some time, calling for a sustained commitment to accommodation, along with additional fiscal support," Fed Governor Lael Brainard said in a speech earlier this month. "With the policy rate constrained by the effective lower bound, forward guidance constitutes a vital way to provide the necessary accommodation."

FRAMEWORK SHIFT

Ahead of further monetary easing, the Fed is set to adopt a new framework under which it would purposely exceed its 2% inflation objective to compensate for extended periods of zero rates and subdued prices. It is expected to formally revise its policy strategy at the September meeting.
The shift toward average inflation targeting will mark the culmination of a months-long policy framework review, which will likely also include small revisions to the Fed's communications strategy and dot plot.
Given that inflation has been below target for some time, forward guidance to keep the policy rate at zero until inflation has overshot 2% for a time would be consistent with hitting an objective focused on average inflation.

However, a lack of consensus on whether caps on the short end of the yield curve would help reinforce the credibility of forward guidance is likely an indication that some framework issues are still under debate, former senior Fed officials said.

MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
USPolicy NewsFederal ReserveNorth AmericaHomepageWatchStoryRegionCentral Bank News
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
USPolicy NewsFederal ReserveNorth AmericaHomepageWatchStoryRegionCentral Bank News

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