By Steve Matthews and Emily Barrett
Federal Reserve officials, who recently unveiled a more relaxed strategy on inflation, have an opportunity Wednesday to back up the plan with details as they look to accelerate the US economic recovery.
The Federal Open Market Committee is all but certain to keep its benchmark overnight rate in a target range of 0% to 0.25%, where it’s been since March 15 to help soften the Covid-19 pandemic’s blow. The committee, in its final scheduled meeting before the US election on Nov. 3, will release a statement and economic forecasts at 2 p.m. Washington time. Chair Jerome Powell will hold a press briefing 30 minutes later.
Officials are expected to project rates staying near zero though 2023, reinforcing the message delivered by Powell in late August that they will delay tightening policy to achieve inflation that averages 2% over time. The new strategy, announced at the Fed’s virtual Jackson Hole conference, tolerates inflation overshooting to make up for past misses and explicitly views maximum employment as a broad-based and inclusive goal.
“Powell will bring home the message that the Fed wants to level the playing field and allow wages more room to run,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “The real goal here is to allow more of those hit hardest by the crisis a better chance at getting reemployed as quickly as possible. They won’t sweat a little inflation for that.”
The Fed has discussed linking rate liftoff to reaching — or overshooting — 2% inflation or to unemployment, in a variation of the thresholds it deployed in 2012. That’s a close call this meeting: 39% of economists surveyed by Bloomberg expect that to happen this week, while others look for a 2021 announcement or no change at all.
Several regional Fed presidents, including Atlanta’s Raphael Bostic and Chicago’s Charles Evans, have said they see no rush to provide additional clarity with markets anticipating a long run of near-zero rates.
“The Fed’s forward guidance thus far has been exceptionally well received, so why would they feel a need to strengthen it with an additional policy response?” said Michael de Pass, head of Treasuries trading at Citadel Securities LLC.
Rates have held relatively steady over the past week, with traders waiting for the FOMC meeting. Most are looking for the Fed to elaborate on how long it plans to hold interest rates near zero, with many expecting policy makers to link any increase to the path of inflation.
Anticipation of the Fed’s new strategy has helped the Treasury yield curve to steepen, and expectations for consumer prices to recover close to 2020 highs, judging by signals from market breakeven rates. If the Fed disappoints investors hoping for more detail, the Treasury curve could steepen further.
JPMorgan Chase & Co. strategists including Jay Barry see a risk that the Fed doesn’t deliver on the market’s hopes for more detail, which “risks unwinding some of the goodwill that has been created in recent months.”
What Bloomberg Economists Say
“Some policy makers remain skeptical that a revamp of rates guidance in the statement is urgent; nobody expects the Fed to raise interest rates any time soon. Bloomberg Economics believes the earlier the Fed clarifies how it will implement its new policy approach, the better.”
— Yelena Shulyatyeva, Andrew Husby and Eliza Winger
The FOMC could tweak its rationale for its purchases of Treasury and mortgage-backed securities to say the program, widely viewed as quantitative easing, is intended to stimulate the economy, not just smoothing market functioning. While an increase in buying or a shift to explicitly cap yields isn’t expected, some say more is needed.
“Doing more QE would be a good follow-up to the new strategy, but now the risk is the post Jackson Hole ebullience falls like a pancake,” said Thomas Costerg, senior US economist at Pictet Wealth Management in Geneva.
The Fed releases new quarterly forecasts. In addition to signaling rates on hold through 2023, officials are also likely to project lower unemployment and the potential for some above-2% inflation forecasts for 2023.
“The unemployment rate forecast has to come down, for 2020 at least, but the forecast is still going to be a gloomy one,” said Jonathan Wright, an professor at Johns Hopkins University and a former Fed economist. Beyond the jobless rate, “other indicators are not strong,” so keeping rates near zero will be the consensus.
While recent economic data including the fall in the unemployment rate have been stronger than expected, the FOMC is likely to continue to emphasize risks to the outlook and uncertainty. Powell gave a hint on Sept. 4 when he told National Public Radio: “The recovery is continuing; we do think it will get harder from here.”
Forward guidance is likely to be a major focus of the press conference, and the chairman can expect to be asked how much and how long of an inflation overshoot he would be willing to tolerate without action.
“Powell is likely to give more clarification to the inflation targeting change announced at Jackson Hole,” said Lindsey Piegza, chief economist with Stifel Nicolaus in Chicago. He may address “why flexibility is necessary and a benefit, how hot is hot, and why there is no near term concern of inflation.”
Powell is also likely to repeat his call for additional fiscal support, with Congress not close to passing additional aid.
Credit: Stocks-Markets-Economic Times