In a Nutshell: “The path of the economy will depend significantly on the course of the virus.”
Decision:Fed funds rate target range remains at 0% to 0.25%.
The Federal Reserve made it clear today that there is no time limit on its intervention in the markets nor is there a limit on the amount of funds it can or will spend to keep the economy from faltering. That was expected and the Fed delivered. But Fed Chair Powell also noted that the Fed can supply funds but cannot spend those funds. Actually, the comment he uses is that the Fed “has lending not spending powers”. Thus, its loan programs may not be right for all businesses. Instead, Mr. Powell noted that additional direct funding on the part of the federal government might be needed. In other words, he was hinting, quite strongly and clearly without saying so, that further fiscal stimulus is required. As is usually the case with Fed Chairs, he declined to advise Congress and the president on what policies to continue funding or at what level. He ain’t no fool!
What the Fed also tried to make clear is that the best economic policy is one that addresses controlling the virus. He noted that the economy would not get back to previous levels until people feel comfortable being involved in all normal economic activities. He commented that measures of consumer spending have softened since late June. The resurgence of the virus in June is having a real effect on household behavior and that is worrisome.
So, what should we take away from the Fed’s actions? First, the Fed is operating on the basis that this could be a long-term problem and is making it clear the monetary authorities are prepared to stay the course. That means interest rates will likely remain near record lows for an extended period. The best way to look at this is in six-month increments, since we know little about the timing of vaccines or treatments. So, rates will likely not be going anywhere for at least the next six months.
But the reality is that the economy will not be getting back to where it was at the end of 2019 for eighteen to twenty four months, a point the Fed Chair made. That implies the Fed is on likely on hold through next year and probably well into 2022. The Fed will also continue its lending policies and much of its market intervention (bond and equity purchases) through next year as well. When the Fed starts lowering its purchases, that will be a signal it is starting to see the light at the end of the tunnel.
Ultimately, it is all about the virus and if we keep making mistakes that cause resurgences to occur, the economy will remain weak and support from both the Fed and Congress, will be needed.
(The next FOMC meeting is September 15,16 2020.)