The Federal Open Market Committee is meeting for the last time before the US presidential election on Wednesday – and for the first time since adopting a new monetary strategy that will be more tolerant of higher inflation and more committed to promoting full employment.
The U.S. economy is still struggling with the shock of the Covid-19 pandemic, and with less financial support on the horizon, Jay Powell, chairman of the Federal Reserve, and other officials will have to consider what additional support they can offer for recovery.
Here are five things to look for:
Pinker forecast with reservations
Fed officials are expected to make a more set of economic forecasts this year than in June.
The unemployment rate has already fallen to 8.4 percent, well below the Fed̵7;s average unemployment forecast of 9.3 percent by the end of the year, so the question will be how low it is expected by December.
Meanwhile, production is expected to decline by less than 6.5 percent this year, forecast by US central bankers three months ago.
The improvements reflect better-than-expected economic performance as it has dealt with jumping infections over the summer. But long-term forecasts may attract more attention as they stretch to the end of 2023.
Will Fed officials expect to remain at zero US interest rates until then, especially given their change in the ultra-loving strategy announced last month, which allows them to allow inflation to exceed the 2 percent target before they tighten policy? And will their inflation forecasts show any excess?
The Fed still believes that the United States expects a long and difficult recovery, and there are great risks on the horizon. The path of the coronavirus during autumn and winter, as it intersects with seasonal influenza, is unclear; new fiscal support for the economy is highly questionable; and the upcoming US election could lead to destabilization if it yields an uncertain outcome.
Beating fiscal alarm
Mr. Powell – and other Fed officials – were clear that they would like Congress and the White House to agree on a new aid package to support the recovery. But while the Trump administration and lawmakers on Capitol Hill ignored them, how hard will the Fed chairman persecute them for their inaction?
The Fed is worried that the lack of a fiscal agreement threatens recovery and will complicate its work. The US Federal Reserve does not want to be left alone in supporting recovery.
The Fed also acknowledged that it lacked the tools to solve all the problems in the economy, as it could only borrow money but not spend it on helping businesses or households. And the Fed is well aware that its policies have done much to save financial markets from disaster, but it cannot so easily benefit low-income families and the unemployed.
New guidelines for a new era
After the Fed made a historic announcement last month that it would tolerate higher inflation, investors wondered how such a policy would work in practice. Since then, Fed officials have supported the new monetary system, but little specific information has been given on what actions to take and when.
One of the potential tools that has attracted the attention of both market participants and FOMC members is a clearer form of direct leadership. This would link the Fed to adjusting interest rates to specific economic indicators, such as unemployment or inflation.
The phrase in the FOMC statement to note is whether the central bank is changing its commitment to keeping rates close to zero “until it is sure that the economy has survived the latest developments” to something firmer.
Another situation is whether the Fed will comply with its obligation to assess economic conditions in relation to its “maximum employment target and its symmetrical target of 2 percent inflation.” Some economists speculate that the Fed may change this by including a reference to the average inflation target of an average of 2 percent “over time,” reflecting its new policy base.
Investors who argue that the new leadership will be distributed this week say the Fed risks losing confidence if it does not act quickly to strengthen its monetary shifts.
The transition to buying bonds
This month, Fed Governor Lael Brainard said it would soon be important for “monetary policy to move from stabilization to adaptation,” as economic recovery progresses.
Investors expect that the ethos will eventually apply to the US central bank’s bond purchase program, which currently involves raising $ 80 billion a month in treasury securities of all maturities. The Fed has identified these purchases as necessary to ensure the smooth functioning of financial markets, which has been the case since March, when trading conditions were traded in the world’s largest public debt market.
The issue facing the Fed concerns the duration of the debt it buys. As the federal government borrowed more, the Treasury shifted the bulk of the issue from promissory notes with a maturity of one year or less to longer-term debt. Many strategists are now calling for an appropriate step in buying the Fed to ensure financial conditions remain free.
Finding a place for the main street
The Fed has generally earned rave reviews for launching a number of emergency lending mechanisms at the start of the pandemic that stabilized and then boosted financial markets.
But there is one exception. The lending program on the main streets, designed to help medium-sized companies, has attracted few customers. Critics say lending conditions are too harsh. Problem sectors, such as commercial real estate, are felt on the sidelines.
Mr. Powell may ask if he is willing to review the capital of the program to make it more attractive, which involves taking on more credit risk along with the Treasury.
“We don’t think the Fed is capitulating to all the demands of the industry and lawmakers, but we hope it will continue to look for ways in the coming weeks to expand and flexibility the main street to get help for more companies,” said Jan Katz, a politician. Capital Alpha analyst, in a recent note.
If the Main Street facility is seen as a failure, Congress may redirect the money allocated to it to other purposes – Mr. Powell may want to fend off.