The Federal Reserve, which has pumped trillions in emergency funding into U.S. financial markets to stem the damage from the coronavirus pandemic, is expected on Wednesday to reiterate its promise to do whatever it takes to support the world’s largest economy.
The U.S. central bank may also signal how long, and by what benchmark, it plans to leave interest rates near zero after the recovery begins from what many economists forecast will be the sharpest downturn in recorded U.S. history this quarter. What no one is expecting from policymakers at this meeting is a detailed forecast for the economy, given the uncertainty around the impact of the virus before a treatment or a vaccine can be found. “We are not expecting any discussion of the outlook, as it remains unknowable,” said Michael Feroli, an economist at JPMorgan.
An increasing number of U.S. states are reopening their economies or at least setting out plans for easing stay-at-home restrictions, leading to fears there could be a resurgence of infections over the coming months and a headache for the Fed as it seeks to estimate the swiftness of the economic recovery. The Fed’s rate-setting committee, which is meeting by videoconference, is scheduled to issue its policy statement at 2 p.m. EDT (1800 GMT). Fed Chair Jerome Powell is due to hold a separate videoconference with journalists half an hour later.
The statement is likely to reflect a sharp downgrade in the Fed’s assessment of the job market, household spending, energy markets and the outlook for inflation since its last meeting in March, before most U.S. states had done much to curtail economic activity and put the brakes on the exploding outbreak. It may also offer clues as to how long the central bank expects to keep supporting the economy.
The Fed did exactly that for about a year starting in December 2012, in the aftermath of the last recession, an approach that research has since suggested helped keep financial conditions loose and hastened a faster recovery. The depth of the economic slowdown is starting to become clear, with more than 26 million people filing new claims for unemployment benefits since March 21. But the Fed and other analysts are still trying to get a handle on the likely shape of the recovery.
Some analysts speculated it will do so at this week’s meeting in order to keep the effective federal funds rate – the Fed’s benchmark overnight lending rate – within target, but others think an adjustment now would be premature. Raising the rate paid on reserves can encourage banks to demand higher rates when they lend money in the federal funds market.
Source: Reuters
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