Fed Meeting to Deliberate on How, When to Roll Out Policy Details - The Wall Street Journal

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Federal Reserve Chairman Jerome Powell and his colleagues will have to consider the sequence of... — Federal Reserve Chairman Jerome Powell and his colleagues will have to consider the sequence of their next moves.
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July 29, 2020 5:30 am ET

Federal Reserve officials are likely to continue their debate Wednesday about how to provide more support to the economy now that interest rates are pinned near zero, but are unlikely to announce major policy changes.

The central bank releases an updated policy statement at 2 p.m. Eastern time after the conclusion of its two-day meeting. Fed Chairman Jerome Powell follows with a news conference starting at 2:30 p.m., at which he could explain how he and his colleagues are thinking about possible additional steps. Here’s a look at what to watch:

Economic Outlook

The economic backdrop has changed notably since the Fed’s rate-setting committee met seven weeks ago—mostly for the worse. After surprising rebounds in employment in May and June, many states have seen significant increases in virus infections, leading to renewed curbs on certain commercial activities and a dampening of consumer confidence.

The Fed isn’t releasing new economic projections Wednesday. The central bank monitors high-frequency data on hiring, mobility and business transactions, and Mr. Powell could use these preliminary indicators to couch any forecasts about future activity, which remain highly uncertain.

Mr. Powell could also face questions over how a new virus-relief bill that is the subject of deliberations between lawmakers and the White House could reshape the outlook.

Forward Guidance

Fed officials face three related deliberations over how to provide more stimulus. The first concerns describing how long the Fed plans to keep interest rates near zero and to continue buying Treasurys and mortgage bonds. Even though the Fed isn’t expected to announce new so-called forward guidance on Wednesday, Mr. Powell could use his news conference to shape expectations about where officials are headed.

The Fed has already provided a measure of forward guidance with projections last month that showed most officials don’t anticipate lifting rates for years. Mr. Powell said in June the central bank is “not even thinking about thinking about raising rates.”

Discussions right now are focused on how to tie their stimulus promises to inflation and unemployment benchmarks. Officials must decide whether to tie their guidance to both, or instead rely more heavily on an inflation goal, since inflation has for years run below their 2% target. Over the past five years, unemployment fell to lower-than-predicted levels, but higher inflation didn’t materialize as forecast. One possible approach would be to avoid the precise, quantitative definition of employment conditions the Fed used last decade.

Asset Purchases

Likewise, officials aren’t expected to announce changes to their current bond-purchase program, but Mr. Powell could update their latest thinking at the news conference.

Since mid-June, the Fed has been buying $80 billion in Treasurys a month and $40 billion in mortgage bonds, net of redemptions. But they are considering how to pivot from a program focused primarily on stabilizing markets toward one that provides stimulus. They have bought $2.5 trillion in assets since March.

To complete this transition, they could announce for how long they plan to continue any purchases and any changes in the composition of Treasurys they are purchasing. The Fed’s bond-purchase programs last decade targeted longer-term securities to drive down long-term yields to spur borrowing. There is less urgency for the Fed to do this right now because long-term yields are very low.

Framework Review

Officials are resuming a yearlong review of the Fed’s long-run policy-setting strategy, which could further complement their broader strategy. Mr. Powell could offer a preview of any conclusions and how soon they could be reached.

Before the pandemic hit, officials were close to agreeing on an important change to their formal statement of long-run goals. The change would effectively abandon the Fed’s longtime strategy of always raising rates pre-emptively to prevent inflation from rising above its 2% target.

Instead, officials would allow inflation to average 2% over time. This means periods of inflation below that level would be followed by periods in which they allow inflation to exceed it. The Fed currently doesn’t take past performance of inflation into account.

Timing Matters

Fed officials have been focused on preserving flexibility as they refine their plans, and they have signaled they aren’t in a hurry to rush out any new policy blueprint because the economic outlook is highly uncertain and because they are satisfied with how investors have interpreted their guidance so far. Short- and long-term Treasury yields, for example, are very low.

Mr. Powell and his colleagues will have to consider how to sequence their next moves, on forward guidance, the bond-buying program and the framework review. The Fed is scheduled to meet again in mid-September and early November.