Fed Meeting to Focus on Laying Out Interest-Rate Strategy
By Nick Timiraos
Federal Reserve officials resume deliberations Wednesday about
how to detail plans to support the economy now that they have
formally adopted a strategy to keep interest rates lower for
Officials' public remarks before entering their traditional
pre-meeting quiet period two weeks ago suggested they hadn't yet
decided how to reconfigure their policy statement to reflect the
new framework. This raises the prospect they could make a few
changes now and more extensive ones later this year.
The central bank releases its policy statement at 2 p.m. Eastern
time along with new economic projections. Fed Chairman Jerome
Powell follows with a press conference at 2:30 p.m., at which he
could explain how he and his colleagues are thinking about possible
Here's what to watch:
For the last six months, the Fed's policy statement has said
officials would keep rates near zero until they are "confident that
the economy has weathered recent events and is on track to achieve"
the central bank's inflation and employment goals. Several
officials have said this language, introduced when the Fed cut
rates to near zero on March 15, will eventually need to be
While the statement Wednesday could include tweaks to reflect
the adoption of a new framework that seeks for periods of higher
inflation following episodes of inflation below the Fed's 2%
target, it isn't clear if officials will agree this week on how or
when to make their guidance more specific.
Several officials have said they are in no rush because they
want to have more clarity about the economic outlook and because
investors already expect the Fed to keep rates low for several
But other officials have said this guidance should build on the
new framework by spelling out specific inflation and labor-market
conditions consistent with keeping rates near zero. These steps
could help convince markets that the Fed won't raise rates
aggressively even after the virus has been controlled and the
economy is on sturdier footing.
Nearly all Fed officials in their June projections saw rates
staying near zero through 2022. Their new projections will run
through one additional year and are likely to show rates holding
near zero at least through 2023.
This would offer a mild form of guidance to reinforce the "lower
for longer" rate refrain that emerged from the framework review. It
might have little immediate effect because investors in futures
markets don't expect the Fed to lift its benchmark rate until
Officials could acknowledge stronger growth has materialized
than anticipated in June. The unemployment rate fell to 8.4% in
August, below officials' June projections that it would average
between 9% and 10% in the last three months of the year.
But this might do little to change their midrange outlook.
Officials could project a less severe downturn this year and a
somewhat less buoyant rebound in 2021. Officials have indicated
concern that easy gains from reopening the economy could mask
deeper scars, as the most vulnerable businesses shut down and
employees in hard-hit sectors face longer spells of
Economic projections that run through 2023 offer little insight
on their own given high uncertainty. But in combination with the
rate projections, they could shed a little more light on why
officials think low rates will be necessary -- including because
inflation remains at or below 2%.
Officials could also clarify that their purchases of Treasury
and mortgage-backed securities, initiated in March with the stated
goal of repairing market functioning, are being maintained now to
support a faster economic recovery. Since mid-June, the Fed has
been purchasing $80 billion a month in Treasurys and $40 billion a
month in mortgages, net of redemptions, down from even larger
quantities in the spring.
Reframing the reasons for these purchases would have little
effect on its own, but it might raise questions about when or how
the Fed might adjust the bond purchases.
These questions include whether to link guidance about rate
plans to the pace of asset purchases and whether to shift purchases
of Treasurys to longer-dated securities, as the Fed did during its
bond-buying program from 2012 to 2014. Currently, the Fed is
purchasing a wider range of short-, intermediate- and long-term
"We have so much [Treasury] supply coming down the pike that the
market wants something a little bit more specific," said Priya
Misra, head of interest-rate strategy at TD Securities.
The Fed's new long-run strategy says that following periods when
inflation has run persistently below the central bank's 2% target,
officials will want inflation to run moderately above 2% for some
time. Mr. Powell is likely to face questions at the news conference
over how to define vague terms like "moderately" and "some time"
that address how far and for how long officials would allow
inflation to rise above 2%.
So far, most officials have shied away from providing such
specifics, emphasizing they aren't following a mechanical rule to
anchor inflation expectations and instead want to maintain
flexibility. As a result, it would be a bit surprising if Mr.
Powell delivered more precision Wednesday.
Write to Nick Timiraos at email@example.com
(END) Dow Jones Newswires
September 16, 2020 05:44 ET (09:44 GMT)
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