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Comment: FOMC meeting minutes from April 28-29 show a lot of things have yet to resolve

The minutes of the April 28-29 FOMC meeting are three weeks old. The content of the minutes in the context of the intervening period show that the FOMC is still comfortable with the decisions undertaken previously, and on course to do their part in navigating the crisis.

The main points in the minutes were:

Notable improvements in financial conditions reported by SOMA manager. Well, we knew that and it has continued in the intervening weeks. More progress should be made as a number of liquidity facilities come online. Nonetheless, “market participants remained very uncertain about the economic outlook, and contacts highlighted an array of remaining risks, including those in corporate credit markets, emerging markets, and mortgage markets.” A lot of these uncertainties are far from being resolved as tentative efforts to open up some economies at home and abroad show that the spread of COVID-19 is not yet contained.

Three weeks ago, the Open Market Desk was starting to scale back on its purchases of Treasury notes and bonds, and Agency MBS due to “considerable improvement” in critical market functioning. The weekly balance sheet data in the H.4.1 report show this trend has continued as the SOMA manager expected. The caveat was added that “the Desk was prepared to increase purchases as needed should market functioning worsen.” This has not changed.

While conditions in money markets “had improved over recent weeks” and “intense strains” had “subsided”, although “rates in some short term funding markets remained elevated”, if expected to ease in the near term. With less need for the same level of “ample reserves”, “the manager noted that it might be appropriate to position the Federal Reserve’s repurchase operations in a backstop role. For example, the minimum bid rate in repo operations could be increased somewhat relative to the level of the interest rate on excess reserves (the IOER rate).”

The need was discussed for a upward technical adjustment to IOER “in order to move the federal funds rate closer to the middle of the target range and to address market functioning issues that could arise over time with overnight rates at very low levels.” However, conditions do not seem to warrant it at present as “there were few signs to date that the low level of overnight funding rates had adversely affected market functioning, and trading volumes remained robust.”

The annual approval of swap line arrangements and liquidity swap arrangements took place.
To no one’s surprise, “Participants noted that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health were inducing sharp declines in economic activity and a surge in job losses.” Inflation was weaker in part due to sharp decline in oil prices.

The pandemic was expected to “continue to weigh heavily on economic activity, employment, and inflation in the near term and would pose considerable risks to the economic outlook over the medium term.” Chair Powell has echoed this repeatedly in the three weeks since the meeting. He has also highlighted the FOMC’s concerns “that the burdens of the present crisis would fall disproportionately on the most vulnerable and financially constrained households in the economy.” Analyses out of some of the regional District Banks and the Fed Board of Governors research arms have put some hard numbers on this is the last few weeks. Of especial interest is the “Report on the Economic Well-Being of U.S. Households”.

The FOMC noted extreme declines in employment by the time of the April meeting and “downward pressure on prices” from energy, a strong dollar, and greatly reduced demand for goods. “The overall effect of the outbreak on prices was seen as disinflationary,” the minutes said. However, while return to the 2% objective was anticipated to be “further delayed”, “the accommodative stance of monetary policy would be helpful in achieving the 2 percent inflation objective over the longer run.”

Fiscal programs “were crucial for limiting the severity of the economic downturn”. Still, an “extraordinary amount of uncertainty and considerable risks to economic activity in the medium term” made it difficult to assess the outlook. Among the FOMC’s scenarios, it anticipated “a substantial likelihood of additional waves of outbreak in the near or medium term” and “further economic disruptions”. Recovery might be quicker if households and businesses “become sufficiently confident to relax or modify social-distancing behaviors over the next several months.”

There was no change in monetary policy at the meeting, however, “the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions. Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit,” using quantifiable goals like an unemployment rate, or date-based forward guidance. The FOMC has used these before. (Please see discussion on the evolution of forward guidance in the Whetstone Analysis Reference Library page on Federal Reserve Rate History.)
There was not discussion of the use of negative rates. Chair Powell’s recent remarks have indicated the use of negative rates remains buried deep in the monetary policy toolbox and the FOMC does not intend to use them.

Asset purchases are anticipated to continue. The minutes said, “Several participants also remarked that the Committee may need to provide further clarity regarding its intentions for purchases of Treasury securities and agency MBS; these participants noted that, without further communication on this matter, uncertainty about the evolution of the Federal Reserve’s asset purchases could increase over time.” In his testimony at before the House Banking Committee on May 19, Powell offered some reassurance that nervousness about the size of the Fed’s holdings was overblown and expressed confidence that asset purchases could continue as necessary. There was some skepticism about that, but the necessity to support markets and the economy mean that unconventional policy is going to be used expansively.

Importantly, the Fed has not abandoned is review of the monetary policy framework. The minutes said its conclusions should be published later in 2020. This will be a little later than the previous talk of a mid-2020 publication, but a delay is understandable at this juncture.

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