US Fed unlikely to offer new guidance on rates this week

September 16, 2020

US Fed unlikely to offer new guidance on rates this week

While US Federal Reserve has adopted a new policy strategy on inflation, the central bank is unlikely to provide new forward guidance on short-term interest rates at its meeting this week, economists have said.

During the Kansas City Fed’s annual Jackson Hole research conference held last month, Fed Chairman Jerome Powell announced that the central bank will seek to achieve inflation that averages 2 per cent over time. The new strategy would allow a modest overshoot of inflation so as to trigger more “inclusive” employment and wage gains, Xinhua news agency reported on Tuesday.

But Fed officials have yet to come to a consensus as to what an overshoot on inflation would actually look like since Powell’s announcement, according to Diane Swonk, chief economist at Grant Thornton, a major accounting firm.

“They have not agreed on how high or how long an overshoot of the 2% target the Fed should actually tolerate,” Swonk wrote Sunday in an analysis, adding the Fed is expected to ease its stance on inflation without fully defining what that new stance means.

Tim Duy, professor of the University of Oregon and a long-time Fed watcher, believed that the Fed will likely remain content to use the new strategy as justification for maintaining the current near zero rate path.

“The odds favour the Fed maintains the status quo at this week’s meeting. It does not appear to have a consensus on enhancing forward guidance nor do I suspect FOMC (Federal Open Market Committee) participants feel pressure to force a consensus on that topic just yet,” Duy wrote Tuesday in a blog post, referring to the Fed’s policy-making committee.

“We had anticipated changes to forward guidance to occur at the September meeting but recent comments by Fed officials imply little urgency and a preference to wait for greater clarity about the outlook,” echoed Ryan Sweet, an economist with Moody’s Analytics.

“Therefore, we now anticipate the central bank to adopt outcome-based forward guidance in November,” Sweet said.

Some Fed officials have said that there’s no urgency for the central bank to update guidance on how long it will hold short-term interest rates near zero, as market participants understand the Fed won’t raise rates any time soon.

“Market expectations are that rates will be low for a long period of time, and so I don’t feel like there’s a burning pressure that we need to change our forward guidance today to change market expectations,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in a recent interview with the Bloomberg Odd Lots podcast.

The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of US treasuries and agency mortgage-backed securities to repair financial markets. It also unveiled new lending programs to provide up to US $2.3 trillion to support the economy in response to the coronavirus outbreak.

The Fed is scheduled to release a policy statement and its updated quarterly forecasts for the US economy Wednesday afternoon after wrapping up a two-day meeting.

“I suspect the overarching message from this meeting will maintain the theme that given the loss of fiscal support, the recovery is very fragile and dominated by downside risks such that they laugh at even the idea of thinking about raising interest rates,” Duy said.

“Powell will underscore that additional aid from Congress is needed to ensure that the economy heals from the damage triggered by the pandemic,” Swonk noted, adding the Fed’s post-meeting statement is likely to reflect the concern that “the economy is losing momentum after the initial surge that followed lockdowns.”

The US economy grew modestly over the summer amid continued uncertainty about the pandemic and its negative effect on consumer and business activity, according to a Fed survey released earlier this month.