WASHINGTON – The Federal Reserve is meeting after the undecided presidential election and just before the October jobs report, which analysts expect will paint a complex picture of a growing economy. recovery, but faces slowing progress and major risks.
Policymakers will likely adopt a wait and see approach at the end of Thursday’s two-day meeting, as they face uncertain prospects and because they want to avoid bringing the Fed into the story. vote. But they can use the discussions this week to lay the groundwork for future actions.
The economy, which recovered rapidly as state and local embargoes eased this spring, has seen its progress weaken as the pandemic persists and its own support. Cover for households and businesses expires. Virus cases are on the rise again, overwhelming hospitals in some cities and increasing the likelihood of new closures in some jurisdictions.
To put an end to this moment of high drama, Americans have been taking polls this week, and the results of the election are still uncertain. It seems that Joseph R. Biden Jr may be able to capture the White House while Republicans keep the Senate, leaving the government divided and possibly cooling the prospect of a major bailout.
The increasingly dangerous economic outlook and changing political landscape could light a new point for the Fed. Without financial support, its policies could be crucial to help recover through this winter’s pandemic. Yet another important question remains: Even if policymakers want to act decisively, how much more can they do with interest rates close to zero?
“They are not completely out of ammo,” said David Wilcox, former director of research and statistics at the Federal Reserve in Washington. But “on the whole, at this point,” he added, “the fiscal policy is in effect to advance and rescue a situation that I am quite concerned about.”
Here are the things to note during this week’s meeting.
Buying bonds is in a difficult situation.
The Fed cut interest rates to almost zero in March, announcing later that month that it is willing to buy an unlimited amount of bonds to soothe troubled markets and has since June committed to buy “ at least ”$ 120 billion in government-backed bonds per month. .
The central bank made it clear in September that those purchases are meant to boost lending and spending, in addition to supporting the market, but analysts are looking for more.
Many economists believe that Fed officials can extend the term of their bond portfolios – meaning they will start buying longer-term bonds in an attempt to push interest rates on. those stocks down. The point is to make more credit cheaper, which can help support borrowing needs and needs. The Fed minutes of the September meeting suggested that officials could discuss and refine communications around their balance sheet plans at upcoming meetings, but few economists expected. These big moves soon.
Economists at Evercore ISI wrote in a meeting preview note: “The committee does not appear ready and there is a possibility that a reduction immediately after the vote will look political and better to wait for the dust to settle down ”.
Emergency programs face an uncertain future.
The Fed introduced a series of emergency lending programs to keep markets active and credit in motion when key parts of the financial system were arrested in March and April. Some have been very successful, allowing money to flow into the corporate debt market. Other efforts, never previously tested – including a midsize business loan program and a local bond buying effort – have been used only lightly.
Now, programs funded by pandemic relief legislation are at a crossroads. They are expected to expire by the end of December, and Fed chairman Jerome H. Powell, and Treasury Secretary Steven Mnuchin, have to decide whether to extend them to 2021. In answering Congressional questions, Mr. Mnuchin suggested that he favors allowing at least one – the municipal bond program – to end.
There are big questions around what it would mean if the entire suite was allowed to shut down. The markets, on the other hand, are currently operating smoothly, and the Fed has shown a willingness to step in that could keep them calm even in the absence of reality shows. However, the elimination of an official setback as soon as the country falls into new tensions, with election uncertainty and rising viral cases, could undermine confidence.
“I think that’s important – you need to see those facilities expand, especially if you’re not excited,” said Matthew Luzzetti, chief US economist at Deutsche Bank. US chief at Deutsche Bank, said. “Just having that support is a really important signal to the market that the Fed is there.”
Mr. Powell will inevitably face questions about whether programs are allowed to be postponed during his press conference after the meeting. For now, the issue is still of concern, but it may be because investors have assumed the programs will be expanded.
“Most people seem to assume they will automatically renew them,” said Cornerstone Macro’s Roberto Perli. “It’s an issue that the market doesn’t digest well.”
It’s all about melody.
The press conference could be the star of this agenda. Due to the expected lack of concrete action, the tone that Mr. Powell emphasized during his post-virtual meeting speeches, which will start at around 2:30 p.m., may be the most important thing coming from the meeting. November meeting.
He is likely to continue to commit for a long time when interest rates bottom out. And he seems a bit nervous, given the economic background.
It’s worth noting that although the Fed chairman previously took a glimpse of key numbers from the employment report – the White House’s Council of Economic Advisers sent data on participation, unemployment. and wages the night before – Mr Powell will have no figures on hand by the time the Fed decides and press conference. People familiar with the process say reports typically arrive later in the day.
The data that Mr. Powell will have on hand is wavering.
Manufacturing gauges showed improvement, but a service industry tracker began to weaken and data from private payroll processor ADP showed private sector employment growth. are weakening. While these numbers don’t always match closely with official government reports, the average economist in a Bloomberg survey predicted that job growth slowed to around 590,000 by month. 10 – progress is relatively slow at a time when millions are still unemployed.
Mr Powell may continue to suggest that additional government support for disadvantaged households is needed, as he did, but the prospects for a large package seem blurred.
“Everyone believes in a sizable financial package,” Perli said in an interview Wednesday morning. “Who’s going to pick up the chicks? There will be more burden on the Fed. “
He noted that while the amount and level of efficiency is unknown, the central bank can help at this point, “that doesn’t mean the Fed can say,” I can’t do anything here, goodbye. “