Spotlight: U.S. Fed to debate more economic stimulus amid COVID-19 resurgence

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Photo taken on June 16, 2020 shows the U.S. Federal Reserve in Washington, D.C., the United States. (Photo by Ting Shen/Xinhua)

A notable change since the Fed’s last meeting in early June is that coronavirus infection rates have accelerated in many states and at least 22 states have either paused or partially reversed their efforts to reopen their economies.

WASHINGTON, July 28 (Xinhua) — The U.S. Federal Reserve is expected to debate how to provide more stimulus to the coronavirus-ravaged economy at its two-day policy meeting starting Tuesday, but the central bank is unlikely to announce major policy changes this week despite a recent resurgence in COVID-19 cases, analysts said.

“The Fed is stuck between the emergency actions of this past spring and the next steps to bolster the recovery that will come later this year,” Tim Duy, professor of the University of Oregon and a long-time Fed watcher, wrote Monday in a blog post.

“The most likely outcome for this week is no policy change but a dovish tone to the statement and the press conference,” Duy said, referring to the Fed’s post-meeting statement and Chairman Jerome Powell’s press conference scheduled Wednesday afternoon.

File photo of Tim Duy, professor of the University of Oregon and a long-time Fed watcher. (Photo credit: uonews.uoregon.edu)

The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of U.S. treasuries and agency mortgage-backed securities to repair financial markets. It also unveiled new lending programs to provide up to 2.3 trillion U.S. dollars to support the economy in response to the coronavirus outbreak.

A notable change since the Fed’s last meeting in early June is that coronavirus infection rates have accelerated in many states and at least 22 states have either paused or partially reversed their efforts to reopen their economies.

While the Fed could acknowledge the resurgence of COVID-19 as a downside risk to its outlook, this week’s post-meeting statement is unlikely to have significant changes, according to Ryan Sweet, an economist with Moody’s Analytics.

File photo of Ryan Sweet, an economist with Moody’s Analytics. (Photo credit: events.moodys.io)

“We do not expect anything significant out of this week’s meeting of the Federal Open Market Committee. The pace of asset purchases will remain unchanged, while neither the target range for the fed funds rate nor the interest rate on excess reserves will be adjusted,” Sweet wrote Monday in a note.

But Fed officials will continue debating how to provide more stimulus to the coronavirus-ravaged economy at this week’s meeting, which could pave the way for announcing a new strategy at its September meeting, analysts said.

“We expect the July meeting to kick off a lively two months of discussion over the direction of monetary and interest rate policy in the coming years,” said Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP.

File photo of Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP. (Photo credit: rsmus.com)

“The Fed is challenged with creating the conditions for a policy path that will permit the central bank to respond to a wide range of possible outcomes around the evolution of a severely impaired economy, within the context of the pandemic, and constraints imposed by the polarization of the political sector,” Brusuelas wrote last week in an analysis.

Brusuelas expected the Fed to announce a shift in the policy regime toward “an average inflation targeting” in September, which should put significant downward pressure on longer-term interest rates following the 18-month review of central bank policy.

“We assume the Fed changes its forward guidance in September, when it is likely that the review of its policy framework will be complete,” echoed Sweet, adding the new forward guidance will likely be outcome-based and focused on inflation returning on a sustained basis to the central bank’s 2 percent objective.

“In other words, the Fed would commit to not raising interest rates until inflation shows signs of sticking at or slightly above the objective. This would be consistent with the Fed adopting average inflation targeting,” Sweet explained.

File photo of Diane Swonk, chief economist at Grant Thornton. (Photo credit: grantthornton.com)

However, Diane Swonk, chief economist at Grant Thornton, a major accounting firm, argued that the Fed should change its forward guidance as soon as this week.

“Why now instead of in September as most are expecting? The resurgence in hospitalizations and deaths due to COVID-19 is taking a toll on growth. Consumer spending has, at best, hit a plateau. Employment may have actually contracted in recent weeks,” Swonk wrote Sunday in an analysis.

“There are some on the Fed now who would rather wait to act until economic conditions further deteriorate. I would err on the side of caution and do more now, given the speed with which economic losses arise and compound,” Swonk added.

Photo taken on June 16, 2020 shows the U.S. Federal Reserve in Washington, D.C., the United States. (Photo by Ting Shen/Xinhua)

The Fed meeting also came as the enhanced federal unemployment benefits that millions of Americans rely upon are set to expire at the end of this month, and U.S. lawmakers haven’t settled their differences over the size and scope of the next COVID-19 relief bill.

“The economy is at serious risk of sliding back into recession-a double dip or W-shape path-unless Congress and the Trump administration come up with another fiscal rescue package before Congress goes on its August recess,” warned Mark Zandi, chief economist of Moody’s Analytics.

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