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Comment: At April 28-29 meeting, FOMC focus probably still on keeping financial markets running

When the FOMC meets on Tuesday and Wednesday, April 28-29, conditions for the US economy won’t be entirely clear, but the Committee will have significantly more data on hand than they did for the emergency meeting on March 15 that preempted the regular session on March 17-18. The deliberations can move past the initial response to rapid deterioration and breakdowns in financial markets – a response which has been effective in reducing the chaos – and moving on to the next phase in getting operations back to more normal functioning.

Stresses in financial markets are less, but still very much present. Right now policymakers are going to continue their focus on providing liquidity and support for financial market functioning, not stimulating the economy. The first wave of urgency is past with its flood of liquidity facilities and decisions to ease up and/or delay some regulation and supervision. The next steps will be fine-tuning what is in place to ensure that lending is getting where it is needed with a minimum of roadblocks.

The timing is fortuitous that the FOMC will receive the April Senior Loan Officer Opinion Survey on Bank Lending Practices at this next meeting. The data associated with the regular questions is likely to show the severity of the situation, while the special questions could illuminate what is on the Fed’s collective mind in terms of what is important to clarify the outlook for lending and/or what challengers are going to be particularly acute for banks. The survey doesn’t have an announced release date, but it should be released at 14:00 ET on Monday, May 4 of the usual release pattern is followed.

The Fed’s dual mandate for maximum employment and price stability is front and center of any FOMC discussions. The surge in unemployment of unprecedented speed in the past few weeks on top of a precipitous decline in oil prices that is dragging inflation downward means that steering policy is going to be trickier than in more normal times.

As noted above, Fed policymakers probably won’t be quite ready to deploy monetary policy for economic stimulus yet. However, they will be making plans based on the economic data for March and April with flexibility built in for when a more complete picture is formed. The FOMC declined to make their quarterly forecast in March due to the exceptional situation with the public health emergency associated with the COVID-19 pandemic. The Committee will probably form an interim forecast but not release it due to still high levels of uncertainty. I would not look for it until the June 9-10 meeting when a normal quarterly release schedule can be resumed.

High on the list of unknowns is where the spate of jobs lost is going to end up.  Weekly initial jobless claims have topped 20 million (unadjusted) in just four weeks. The flood of claims may have peaked in the March 28 and April 4 weeks, but that doesn’t mean that filing won’t continue at record numbers for a while. In question is how many of these layoffs are permanent and/or how long will laid off workers remain on the benefits rolls? This also doesn’t measure the number of workers who have been laid off without access to benefits. Policymakers need more data to assess labor market conditions and eventually calibrate monetary policy to provide support a recovery.

It is also going to be difficult to get a good read on underlying inflation for the next few months. Plunging energy costs will eventually bottom out, but not before the measures of inflation are distorted as oil prices fell sharply and contrary to seasonal trends. Even core prices – excluding food and energy – are not without problems due to difficulties in taking surveys during the pandemic and disrupted buying patterns for consumers and businesses. It is clear that inflation has declined, but not how much is due to transitory factors.

With short-term rates now resting on or near the effective lower bound (ELB), any changes are going to be minor. It is possible that the FOMC might shave 5 or 10 basis points off the upper end of the fed funds target rate range of 0%-0.25% that it set on March 15. The discount rate could be also be lowered a bit from its current 0.25%. Interest on reserves might get a technical adjustment from its present 0.10%. But at least for now, I would expect that negative rates remain buried in the Fed’s toolbox. More probable is that the forward guidance wording will receive a tweak or two. The March 15 statement said, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The FOMC is also likely to offer assurances that generous asset purchases will continue as long as needed.

If the Fed is planning to introduce any new options for unconventional monetary policy, it will be up to Chair Jerome Powell and his 14:30 ET press briefing to set the stage and explain them. Powell will almost certainly be asked about specifics on future options for monetary policy while rates are near the ELB and asset purchases have already brought the Fed’s balance sheet holdings to new record highs. He has in the past offered assurances that the Fed has options and will deploy them, but previously in the context of a vague future downturn.

 

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