Joggers pass the Marriner S. Eccles Federal Reserve building in Washington, DC on Tuesday, August 18, 2020.
Erin Scott | Bloomberg | Getty Images
With inflation still elusive and a myriad of questions surrounding an economy that has just hit a quarter-record growth record, the Federal Reserve has a choice of whether to wait for conditions to evolve or provide additional assistance now .
Most market participants expect the Federal Open Market Committee to sit on its hands at its Wednesday and Thursday political meeting.
However, officials are expected to discuss the policy options available to them at this point and with so much uncertainty about the current situation, it would not be a big surprise if they took a step.
"I just don't see the benefits of waiting until December," said Aneta Markowska, chief financial economist at Jefferies. "A lot has changed in the past two weeks. Almost all of the worries you reported in September have materialized or are about to materialize. So you no longer have the luxury of time."
That sense of urgency sounds incongruous with an economy that just posted 33.1% annualized GDP growth in the third quarter, has restored 11.4 million jobs since May, and is in the middle of a housing boom.
However, economists at the Fed and elsewhere fear that the best profits will lag behind while the huge tailwind in government stimulus finance has dried up. Rising cases of coronavirus are raising concerns about renewed economic pressure as communities face pressure to reintroduce restrictions on businesses.
And the Fed has another problem on its hands: a market that doesn't necessarily believe in the central bank's recently decided efforts to boost inflation and promises not to raise interest rates until that goal is met.
According to market indicators, inflation expectations have actually fallen since the Fed approved an approach whereby inflation will be above its 2% target after periods like the past decade when it fell below this level. In the past, the Fed has used falling unemployment as a preventive signal to raise interest rates to stave off inflation, which it will no longer do.
A report from the Department of Commerce on Friday showed that headline inflation rose to 1.4% below the Fed's preferred rate for September and was still well below the rate the central bank wanted.
"The market just wanted more follow-through and obviously didn't get it," said Markowska. "In September they may have felt that there was no urgency to do something immediately. What has changed between then and now is that the urgency has increased."
A move to Main Street
In fact, the Fed has already taken an additional measure that the market was looking for.
The Fed announced on Friday that it would relax some of the terms of its Main Street Lending program for small and medium-sized businesses. The central bank cut the minimum loan from $ 250,000 to $ 100,000 and eased debt restrictions on applicants.
In addition, policy makers have fewer and fewer options, about which Fed officials themselves have expressed varying doubts.
"If a major winter virus resurgence turned out to be more economically damaging than expected and the FOMC wanted to respond, its options would be limited," Goldman Sachs economist David Mericle said in a note. "The most likely response would be to adjust the composition or pace of asset purchases, but Fed officials have expressed lukewarm support for such a move because they believe it is unlikely to be particularly effective."
Indeed, market participants broadly expect that the Fed's next move will be to change its asset purchase program. The Fed buys at least $ 120 billion in government bonds and mortgage-backed securities every month, and could change the makeup of those purchases to meet different goals.
For one, it could just expand the level it is buying. It could also extend the maturity of the bonds to influence yields further out on the curve. Eventually, the Fed can continue to change the language in which it sets the objectives of the purchases, from making the market work easier to broader support for the economy.
"We think the Fed will do little more for now, but [Chairman Jerome] Powell will likely reiterate that it is ready to do what is necessary to support the economic backdrop," RBC Capital Markets economists said in one Note.
"While we don't expect the committee to make changes at this meeting, we do expect that the Fed would not hesitate to act quickly if the number of cases increases so much that state governments begin shutting down sectors of the economy." they added.
The Fed will be closely monitoring financial conditions in the coming days and its session will close after a presidential election, the results of which could provide direction for the aggressiveness of the fiscal stimulus.
The recent decline in stock markets is one thing officials will be looking out for, as is the tightening of lending standards and pressure on consumers from a possible virus-induced economic slowdown.
While the committee may decide not to specifically address these issues in its post-meeting statement, Powell will get a chance in its press conference afterwards.
Correction: The Federal Open Market Committee meets on Wednesday and Thursday. In an earlier version, the days were incorrectly specified.