The Federal Reserve Monetary Policy Committee will close its third scheduled meeting since the start of the pandemic on Wednesday, amid concerns about the pace of recovery and uncertainty over Washington’s ability to reach an agreement on a new fiscal stimulus package.
Here are five things to look for when the Federal Open Market Committee makes its statement, and at a subsequent press conference, Jay Powell, chairman of the US Federal Reserve.
The virus hurt healing, but by how much?
The Fed has warned that the US recovery depends on the trajectory of the virus, and new Covid-19 surges across the country have slowed the economic recovery over the past two months. Based on high-frequency employment and mobility data, Fed leaders have expressed concern about the economic downturn this summer.
Mr Powell and the FOMC can say more about whether they see it as a break on the gradual path to better economic health or a reversal that could cause more damage in the form of permanent business closures and job losses.
Mr Powell can emphasize the importance of Americans following the guidelines of US health officials, especially with regard to wearing masks, as a key to fighting the virus and helping the economy.
The Fed is preparing to strengthen its monetary support, but how and when?
The FOMC is not expected to make any major changes to its policy statement. Interest rates are expected to remain close to zero for the foreseeable future and the Fed is likely to renew its commitment to use all its instruments to sustain the recovery.
However, the US Federal Reserve can provide more detailed information on its next steps, in particular through a press conference by Mr Powell.
The minutes of the June meeting showed growing support among Fed officials for a clearer form of further direction guidance – to strengthen its ultralight monetary policy stance.
Options include tying the targeting of inflation or the unemployment rate. Mr Powell can provide information on the status of such discussions and whether there is consensus on the best option.
Priya Misra, TD Securities’ global head of rate strategy, said that in addition to specific policy instruments, it was important for the Fed to sound “very dovish” this week and send a clear signal that more political support will be added soon.
“The Fed knows the market is preparing for this meeting with expectations,” she said. “They need to feed him something.”
Can the Fed push Congress toward a fiscal deal?
Mr Powell has gently but unequivocally pushed the White House and lawmakers on Capitol Hill to maintain fiscal support for the economy during the crisis, and the recent slowdown in the recovery has made aid even more important.
The FOMC meeting is taking place at a crucial time when legislators are trying to reach an agreement on a new stimulus package that would include an extension of special unemployment benefits.
Democrats in the House of Representatives went through $ 3 million with $ 600 a week with increased jobless benefits. The Republican Senate is considering a $ 1n plan with that amount of $ 200 a week.
Mr Powell will not want to appear openly political. However, given the urgency, it may be less sensitive at this stage than in the past in terms of the risk of withdrawing fiscal support, and could indicate that a large package is needed.
Will the Fed adjust the terms of the bond purchase agreement?
A key pillar of the Fed’s anti-crisis strategy is its commitment to buy an unlimited amount of government debt.
In the worst turmoil in the market, the Fed bought the US Treasury Department of all maturities at a rate of $ 75 billion a day. As market conditions began to stabilize, it gradually reduced the volume of its purchases. Now the central bank is buying at a monthly rate of $ 80 billion.
Strategists believe that the Fed will have to shift its approach to buying bonds and focus most of its purchases on longer-dated treasury bonds. They note that the Treasury has increased the spending of funds to finance the mitigation packages that have been taken to limit the economic damage caused by the outbreak.
The central bank does not seem ready to announce a more structured plan for buying assets with fixed amounts for buying bonds. This is likely to happen only when and when the economic outlook is clarified.
It also does not seem likely that the Fed will soon introduce a yield curve control that requires the central bank to set targets for treasury revenues and to buy and sell as many securities as necessary to maintain these levels.
Kathy Jones, Charles Schwab’s chief fixed income strategist, said such a policy may not be necessary yet as Treasury revenues remain close to record lows.
Will the Fed signal any changes in its lending options?
On Tuesday, the Fed moved to avert its own “credit cliff,” as JPMorgan economist Michael Feroli described, by extending its emergency lending plans from late September to late.
The move was not surprising, as Fed officials have indicated that they will keep multibillion-dollar dollars in force as long as the crisis persists, even if they are not being used much. However, she said the Fed’s concerns about the continuing economic crisis and possible turmoil in financial markets heading into the fall.
The big question about the facilities is not how long they will last, but whether they are enough to help those in need, especially medium-sized enterprises and troubled state and local governments. The Fed has faced criticism that the credit criteria are too strict, and conditions may need to be more generous, especially if the crisis deepens.