As expected, the FOMC voted unanimously to leave the target range for the federal funds rate unchanged at 0-0.25% and “committed to using its full range of tools to support the U.S. economy”. The statement also affirmed the continued purchase of UST and MBS “at least at the current pace” to “sustain smooth market functioning and foster the effective transmission of monetary policy”. In a separate statement, the Fed announced the extension of its US dollar swap lines and repo facility for foreign and international monetary authorities through to March 2021. When asked about this at the press conference, Jerome Powell emphasised that “There’s nothing that’s going on in the markets right now that raises any concerns” and it is there as a backstop for markets until they are confident the fallout of the crisis has passed.
The key change to the FOMC statement was the addition of the sentence “The path of the economy will depend significantly on the course of the virus.” Jerome Powell commented at the press conference: “It’s just such an important sentence, we decided it needed to be in our post-meeting statement”. In his prepared remarks he noted while there was an initial recovery as the economy reopened “we have seen some signs in recent weeks that the increase in virus cases and the renewed measures to control it are starting to weigh on economic activity. For example, some measures of consumer spending based on debit card and credit card use have moved down since late June, while recent labor market indicators point to a slowing in job growth, especially among smaller businesses. A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”
Powell’s comments emphasised the severe nature of the economic shock, a long road to recovery, how extraordinarily uncertain the outlook is and that he sees this as a disinflationary shock. On the latter he stated: “We see core inflation dropping to 1%. I do think for some time we’re going to be struggling against disinflationary pressures rather than inflationary pressures.” He noted the monetary policy framework review discussions (which had been delayed by the onset of the pandemic) had resumed: implications for the inflation targeting objective is one area of market focus.
Overall, this suggests to us that an extremely accommodative monetary stance is likely to persist in the US for some considerable time. In terms of further policy responses, Powell acknowledged that there was likely to be sectors that take longer to recover and “that there will be a need both for more support from us and more fiscal policy”. Congress has a role to play in terms of using its spending powers and providing grants targeted to afflicted areas of the economy, areas that the Fed’s lending powers are less effective in reaching. Thus, with some signs of a slowing in the recovery and the emergency unemployment benefits due to expire at the end of the month market attention is likely to turn to Congress’ progress in agreeing additional support measures.