When the FOMC meets on Tuesday and Wednesday, June 9 and 10, it is too soon to look for any change in monetary policy. Fed policymakers have widely termed current monetary policy as “appropriate”. The main shift in tone of the FOMC meeting statement from the prior one on April 29 could be from a sense of being in the midst of crisis to one where policymakers have a better handle on the situation. They can effectively act to mitigate the damage now that the initial impact appears to have bottomed out. Crafting the right measures to stimulate the economy will wait until policymakers have enough information to understand where and how it can best be applied. In the meantime, the FOMC will build on success in stabilizing financial markets and utilizing facilities to ensure credit gets to where it is most needed to cushion hard-hit private and government sectors.
On the topic of monetary policy, I think:
• The FOMC will not alter short-term rates except perhaps minor technical adjustments to IOER. As a side note, Chair Jerome Powell and others keep getting questions about using negative rates. If asked, look for Powell to shoot it down again in his back-and-forth with reporters at the 14:30 ET press briefing on Wednesday.
• The language on forward guidance could get a small tweak, but I anticipate it will be unchanged at the wording or intention from recent FOMC statements which 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 key here and for the time being is the word “confident”. I also anticipate that Powell’s press briefing will reiterate caution about the outlook until it is reasonably clear that the COVID-19 pandemic is under control and more public health measures are not going to require quarantines of individuals and businesses on a wide scale.
• The FOMC probably won’t change the language regarding open-ended buys of Treasurys and Agency MBS, and the use of large-scale overnight and term repurchase agreement operations. However, the weekly H.4.1 report shows that the pace of purchases has eased. Powell will note this in his remarks to the press while reassuring that these will be increased again if necessary.
The meeting will include the first update to the quarterly Summary of Economic Projections (SEP) since the December 2019 deliberations. The usual March SEP would have been compiled at a time of upheaval that made it a pointless exercise. While conditions have generally settled down, risks remain greatly elevated. Still, Fed policymakers will have sufficient information to shape a reasonable projection for the US economy, if one that could be subject to big revisions in the future. I would expect that the SEP materials will include more than the usual cautions about reading too much into this forecast.
This is also the last FOMC meeting before the Chair’s semi-annual monetary policy testimony in July (date to be determined). The minutes of the June 9-10 meeting will almost certainly be released before the testimony since these are scheduled for release at 14:00 ET on Wednesday, July 1. Normally I would look for some strong hints on the tone of the Chair’s testimony before the Senate Banking Committee and House Financial Services Committee. However, there’s a fairly wide gap between this meeting and when the testimony is likely to be delivered around mid-July. There’s also that several significant pieces of economic data will be reported in the interim as well as the potential for developments in the COVID-19 pandemic that could change the economic outlook.
Please see the Whetstone Analysis Reference Libraryfor a summary of Semiannual Monetary Policy Testimony.
What I do look for in Powell’s press briefing is a continuation of his efforts to frame the current situation in terms of a healthy economy and sound financial system going into the public health crisis. He will add that good fundamentals could enable the economy to recover more quickly, but do not guarantee it. He will justly praise the Fed’s aggressive and wide-ranging efforts to use its powers as the lender of last resort to ensure that credit gets to where it is needed. He is likely to be pressed on what tools the Fed is going to deploy to achieve its dual mandate, and as noted above this should include questions about the use of negative interest rates. For now, Powell will probably rely on what he has said to-date about employing forward guidance and asset purchase, and possibly looking at controlling longer-term yields, not just short-term rates.
The Whetstone Analysis Reference Library also has summaries of monetary policy decisions, large scale asset purchases, and credit facility formation.
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