Fed still putting out fires
After the monetary and fiscal policy fireworks in March and April, today’s Fed policy meeting almost seemed anticlimactic. The Federal Open Market Committee statement was somber, but largely as expected, especially in that it didn’t change interest rates. It acknowledged the tremendous human and economic hardship being caused by the coronavirus outbreak domestically and abroad, and the considerable risks to the economic outlook in the medium term. It reaffirmed its pledge to act as appropriate to support economic growth. More specifically, it said it will continue to purchase Treasury and agency mortgage-backed securities to the amounts needed to support smooth market functioning. We had hoped the Fed would raise rates on the reverse repo facility and interest paid on reserves to give repo rates a little breathing room relative to the zero lower bound. But the committee opted to keep them at 0% and 0.10%, respectively.
Chair Powell made it clear during the press conference that the Fed’s quick and aggressive actions using a variety of tools across a number of markets were done for the purposes of facilitating smooth market functioning and the flow of credit. The Fed expects economic data to be demonstrably weak in the second quarter, with the unemployment rate likely reaching double digits. He said that the labor market will take some time to recover even as some regions start the cautious process of reopening. In short, the Fed will be in no hurry to raise short-term rates or to roll back any of the measures put in place. Indeed, the door seems to be left open for the Fed to do even more to ensure a robust recovery. That could include the use of forward guidance, a formal quantitative easing (QE) program or to expand the facilities already in place.