When the FOMC meets on Tuesday and Wednesday, March 17-18, expectations are high for another rate cut after the March 3 intermeeting decision to reduce the fed funds target range by 50 basis points to 1.00%-1.25%. This might be a more modest 25 basis points that would leave room for further reduction in interest rate policy down the road. Or it might be an aggressive 50 basis points to signal the Fed’s willingness to take out a bigger insurance policy to protect the economy from slipping into recession. It would leave a little space for another small rate cut or two before hitting the effective lower bound (ELB), but not much. There’s also the option of bringing back the unconventional monetary policy tools, i.e. forward guidance and/or large scale asses purchases (so-called QE).
The problem is that most of the economic data has not caught up with developments in the real economy in recent week. Solid information is hard to come by and policymakers may have to rely more on the anecdotal evidence of their business contacts across the 12 District Banks.
Policymakers will also have to make their best assessment of conditions in financial markets at a time when the situation is fluid. So far nothing that central banks – like the Bank of England, ECB, and Reserve Bank of Australia – have done in terms of interest rate policy has more than briefly stemmed to drop in equities markets. Credit markets have seen some difficulties in liquidity that the New York Fed – acting on directives from the FOMC – tried to address first on Monday, March 9 with expanded size of overnight and term repo operations and then on Thursday, March 12 with the addition of large size term repo operations to the tune of $1.5 trillion total for a start. This included:
- Reserve management purchases already in place for $60 billion a month expanded the range of purchases of Treasurys across maturities “to roughly match the maturity composition of Treasury securities outstanding” beginning on March 13.
- $500 billion three-month repo on Thursday to settle Friday, and also $500 billion three-month repo and $500 billion in one-month repo for same day settlement.
- Three-month and one-month repo operations for $500 billion on a weekly basis for remainder of month schedule. “The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.”
If markets respond positively to these actions, the larger rate cut may not be seen as necessary. On the other hand, policymakers may consider earlier and more aggressive action appropriate in the context of their review of the framework of monetary policy. At this writing, I think the FOMC will go for another 50 basis point cut and perhaps reintroduce forward guidance in an effort to forestall having to deploy large scale asset purchases. The scope of the negative impacts from COVID-19 are not known. Just how deeply these will seep into the US economy are hard to assess. While not confined to sectors like travel and tourism, this is where the initial wave of impacts is the most obvious and quantifiable. Surveys of activity in manufacturing and services indicate supply chains are feeling the pinch from quarantines in China, but this could be alleviated as production resumes later this month. What is more worrisome is that upward momentum for new orders from outside the US has been lost and isn’t likely to rebound until the pandemic has abated. The fundamentals of the US economy are in decent shape right now and may even be sufficient to weather a downturn without entering a recession – however shallow and brief. The Fed may see it as prudent to act swiftly and dovishly even at the risk of having to withdraw the interest rate accommodation sooner rather than later.
For history on Federal Reserve and other central bank monetary policy actions, large scale asset purchases, and financial crisis liquidity programs, please see the Whetstone Analysis Reference Library.
The statement that is released at 14:00 ET after the Tuesday-Wednesday meeting will reflect the vastly increased uncertainty about the outlook for the economy and a more downbeat assessment of current conditions. There will probably be specific references to the unknowns associated with the spread of COVID-19 and its effects on the domestic and global economy. This meeting will also have an update to the Summary of Economic Projections (SEP). It can be anticipated that policymakers are going to have a tough time making a reasonably sound forecast about the US economy over the remainder of this year and into the next two. I would anticipate that median forecasts for GDP will be revised lower from the December 2019 estimates, and possibly more than one-tenth that is more typical of normal revisions. If so, there may be a note with the SEP to highlight the unusual difficulty in forecasting in the present circumstances.
Chair Jerome Powell’s press briefing at 14:30 ET on Wednesday will be an exercise in frustration as he tries to clarify the monetary policy outlook at a time when clarity is hard to come by. He is probably going to have a particular tough time with distinguishing the provision of generous liquidity to markets from large scale asset purchases given the size of the program announced March 12. He will certainly be asked if the FOMC discussed buying assets and/or about other unconventional policy options that might come into play. Former Chair Ben Bernanke has famously said that expansions do not die of old age, they are murdered. Powell’s task will be to help ensure – along with fiscal policy – that the present record long expansion manages to not succumb to COVID-19. Restoring calm and confidence is part of that, but so far no one person or institution has been able to achieve that in financial markets. As a footnote to that, I think that policymakers will work hard to reach a consensus and avoid a dissent in the vote. A split decision would cut into confidence about the Fed’s policy.
Disclaimer: Whetstone Analysis provides commentary as a service to its subscribers. Whetstone Analysis is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained within the site. While the information contained within the site is periodically updated and every effort is made to ensure its accuracy, no guarantee is given that the information provided in this Web site is correct, complete, and up-to-date. Click here to read our full Disclaimer.