“The stakes are actually really high given how little we expect out of” the meeting, said Ernie Tedeschi, policy economist at the investment bank Evercore ISI.
Since March, the Fed has slashed its benchmark short-term rate, bought $2.2 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out nine lending programs to try to keep credit flowing smoothly. Most analysts expect the Fed to pause for a while and assess the economic landscape before embarking on any further actions.
“Now, it’s sort of, ‘Let’s stop, regroup and think about what our next steps will be,’ ” said Tim Duy, an economics professor at the University of Oregon and author of the FedWatch blog.
The Fed’s actions are widely credited with having helped fuel an extraordinary rally in the stock market, which has regained its pre-pandemic high after a dizzying plunge in March. And by committing to buy corporate bonds, reinvigorating the market for such securities, the Fed has also ensured that corporations can continue to borrow. Its initiatives also include a first-ever program through which the Fed is buying state and local government debt to support the municipal bond market.
“The Fed has done miracles in terms of providing liquidity and bringing down the temperature in markets,” Kristalina Georgieva, managing director of the International Monetary Fund, said Tuesday in a U.S. Chamber of Commerce forum.
Many economists say those steps have prevented the downturn from getting even worse, by keeping credit flowing. On Monday, the National Bureau of Economic Research, the official arbiter of recessions, declared that the U.S. economy entered a recession in February.
And in remarks last month, Fed Vice Chair Richard Clarida stressed that the viral outbreak remains a menace to the economy.
“The coronavirus pandemic poses the most serious threat to maximum employment and, potentially, to price stability that the United States has faced in our lifetimes,” Clarida said, referring to the Fed’s two mandates.
But he also indicated that Fed officials want to see a few more months of data to gauge the economy’s health before determining their next steps.
“We are just really in an uncharted situation right now,” Clarida said, in remarks before the New York Association of Business Economists. “We’ll begin to get a better sense of the scenario and the trajectory that the economy is on in the early fall.”
For now, Fed officials likely feel little pressure to act further because few investors expect them to make any changes to their benchmark rate anytime soon. Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, noted that futures markets aren’t pricing in a rate hike until 2023.
Though the Fed could technically cut rates into negative territory, Powell has largely rejected negative rates as an option, saying they wouldn’t have much benefit and has pointed to Europe as an example. And at a meeting last fall, all 17 members of the Fed’s policy committee opposed negative rates.
Still, there are additional steps the Fed can take. Most analysts expect that sometime in coming months the Fed will specify how long it’s prepared to keep short-term rates near zero and how much bond buying it will do to hold down longer-term rates. This guidance can help the economy by reducing the likelihood that investors will send longer-term rates up.
In August 2011, as the economy struggled to recover from the 2008-2009 recession, the Fed for the first time set a specific date for any potential rate hikes, saying it would keep rates low “at least through mid-2013.” That date was then extended twice until mid-2015.
But the Fed in December 2012 replaced its date-based guidance. Instead, it said it would keep rates at nearly zero “at least as long as the unemployment rate remains above 6.5%.” Most economists considered this approach more effective because it assured that economic progress would have to be made before the Fed would tighten credit.
Fed officials are likely discussing this week when to announce a bond-buying effort and how large it would be. The Fed has bought $2.2 trillion in bonds since March, when financial markets locked up as investors rushed to unload Treasurys and nearly all other securities in exchange for cash.
The markets are now largely functioning. and the Fed’s purchases have slowed to a pace of about $85 billion a month. Analysts expect the Fed eventually to clarify the amount of its future purchases and to explicitly shift the purpose of its buying. Currently, the Fed says the goal is to help financial markets function. Analysts expect the rationale will shift to keeping long-term interest rates low.
Yields on the 10-year Treasury note, which are near historic lows, could rise as the government issues trillions in Treasury securities to fund an annual deficit projected to reach $3.7 trillion this budget year.
On Wednesday, the Fed will also provide its estimates for future economic growth, inflation and unemployment. The Fed typically provides such forecasts quarterly, though it skipped doing so in March because the viral outbreak had heavily clouded the outlook.
The projections also include each policymaker’s own forecast of when the Fed will raise its benchmark rate. Economists think most of the policymakers won’t project any rate hikes through 2022.