FOMC Statement and Press Conference — Highlights and Analysis

June 10, 2020

Today’s FOMC statement is nearly identical to the one released after the late April meeting with the notable modification that financial market conditions, which then were being impaired by economic activity disruptions, have since improved. Policy measures, goals and intentions remain as before, but there is a hint that purchases of Treasuries and other bonds might change. In April statement, the pledge was to continue such purchases, and today’s statement adds a time dimension to that promise of “over coming months” and qualifies the size of such purchases as “at least at the current pace,” which implies the purchases could increase in size if deemed needed.

The table of forecasts¬†shows a median forecast contraction of GDP in 2020 of 6.5%. That compares with December’s projected rise of 2.0% and a recent forecast from the World Bank of negative 6.2%. Positive growth of 5.0% and 3.5% are predicted in 2021 and 2022, but unemployment falls to 9.3% in the fourth quarter of this year and 5.5% by 4Q22. That still above the perceived longer run non-inflationary jobless rate of 4.1%. Not surprisingly, therefore, all but two of the FOMC members envisage no change in the federal funds target through the final quarter of 2022. One member thinks a 25-basis point hike in 2022 would be appropriate, and the other dissenter thinks the rate could increase a full percentage point in 2022.

In the press conference, Chairman Powell defended the current settings of monetary policy and differentiated the quickness of the responses of monetary and fiscal policy when the pandemic hit from the slow government responses in the Great Depression. The federal funds rate is now at an effective low, but Powell is confident that the central bank’s other tools are ample to sustain support for the economy and smooth financial market functionality. He mentioned that other unconventional tools are also being discussed such as yield curve control, which is being utilized by some other central banks.

Powell stressed that there is much still be be learned about the effects on the economy of the pandemic and restrictions imposed to manage the virus’ spread, and that learning involves not just the months just ahead but also the possibility of negative effects on potential GDP in the longer run. He conceded that millions of laid off workers this year will not have the same jobs waiting for them or even similar types of work in the industry in which they had been employed previously.

U.S. monetary officials are bending over backwards to not become overly complacent about the recovery. Policy is going to intentionally err on the side of being too stimulative. A faster-than-expected drop in unemployment would be not only tolerated but strongly welcomed. A lesson of recent times is that the U.S. economy handled unemployment that was significantly below its perceived longer-run equilibrium level without igniting inflation or generating financial market stress. America just experienced a record-long economic upswing extending for 128 months that failed to restore the 2.0% symmetric inflation target. In answer to one question, he affirmed that Fed officials are not even thinking about under what conditions they would begin thinking about raising interest rates.

The predictable questions to Powell regarding what should be done in the future from a fiscal standpoint were just as predictably parried. That’s the job of Congress, and the forecasts released by the Fed today and at other times do not presume a changed in fiscal policy until such is done. Similarly, another huge area of uncertainty concerns the medical evolution of Covid-19, and Fed officials are leaving that expertise to the medical scientists. He did concede, however, that flare-ups in the infection rate — in particular areas as well as the country as a whole — carry the risk of doing some enduring future damage to consumer and business confidence beyond the directly negative repercussions of reversing some reopened economic activities.

In spite of the clear message that monetary policy will be prioritizing its employment financial market functionality mandates for the time being, U.S. share prices lost some further ground during the time between the FOMC statement release at 14:00 and the end of Powell’s press conference. The dollar also edged modestly lower.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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