Fed In No Hurry To Raise Rates Or Change Narrative
Fed Board members table

FOMC expected to signal rates will remain low for extended period

Updated economic projections should reflect better outlook than June

Dot plots likely to predict first rate move at end of 2023 at earliest

Rate decision at 14.00 EST /19.00 BST

Press conference: 14.40 EST/ 19.30 BST

 

By Harry Daniels

LiveSquawk News

@harry.daniels71

 

15 September 2020 / 18.00 BST

 

 

Fed Chair Jerome Powell’s speech for the Jackson Hole Symposium  has set the Federal Reserve's position for what it expects to be a long fight against the adverse economic effects of Covid-19. Investors will want more of an explanation as to what this entails but may come away disappointed with the lack of any detail.

 

The Federal Open Market Committee (FOMC) is expected to leave rates and quantitative easing (QE) programmes untouched at the conclusion of its two-day meeting on Wednesday. However, there is potential for the board to further tweak forward guidance.

 

Fed governors will also present an updated Summary of Economic Projections (SEP) in what will be the last scheduled meeting ahead of the 3 November Presidential election.

New inflation goal

In the wake of a review that began in early 2019, the US central bank has updated its monetary policy toolbox, in particular with the introduction of a new inflation targeting framework.

 

At the symposium, Powell said the Fed would replace its old symmetric 2pct inflation goal with a flexible average inflation-targeting framework. The announcement underlined the Fed’s intention to allow consumer price growth to exceed its target in recognition of the seriousness of the current crisis.

 

Ellen Zentner, an economist at Morgan Stanley, posits that the shift has important implications for economic and policy outcomes over the medium term. “Under the new outcome-based approach, the Fed needs evidence of inflation before raising rates, rather than simply forecasting that it will rise. Had this policy framework been in place in the last cycle, with inflation and unemployment evolving exactly as they did, the Fed might have delayed lift-off to as late as 2018, with its overall policy stance more accommodative for longer.”

 

As a result of the significant shift in policy, economists expect new initiatives will be introduced piece-meal. The Covid-19 crisis is far from being resolved, and officials and analysts suggest policymakers want to gain additional clarity about the outlook before adopting more explicit forward guidance linked to either an inflation outcome or a date.

 

Kathy Bostjancic, chief US financial economist at Oxford Economics, said, “We continue to forecast that the Fed will keep the policy rate at the effective lower bound until mid-2024. Open-ended QE should continue at least at the current pace through year-end. Policymakers will likely shift the emphasis of QE asset purchases towards stimulating the economy instead of sustaining market functioning.”

 

Economic projections and dot plots

Overall, the US has fared better than expected, with the economy forecast to recover lost output more rapidly than previously estimated.

 

Labour market data has shown significant rehiring in recent months, but employment levels are still roughly 40pct worse than pre-Covid.

 

In the last set of projections in June, SEP projected a 6.5pct decline in real GDP in 2020 and an unemployment rate of 9.5pct in the fourth quarter of 2020.

 

In what would count as a major upward revision if reflected in the SEP, current consensus is for US GDP growth to contract by -4.0pct quarter over fourth quarter. 

 

Analysts also look for inflation to be revised higher for this year. In June, the Fed projected core PCE would come in at just 1.0pct for 2020 and stay below 2.0pct in 2022. Analysts expect an upward median revision to 1.5pct for 2020.

 

Fed member forecasts for future interest rates are set to be updated at this meeting. Notably, the central bank has extended its economic and rate outlook from the end of 2022 into 2023.

 

In terms of rate moves, SocGen’s North America Analyst Stephen Gallagher said, “The last dot plot showed the median expectations of FOMC participants holding rates steady within the 0.0-0.25pct range through to the end of 2022. Only two participants projected higher rates at the end of 2022.

 

“The door is open for rate hikes by year-end 2023 if the economy meets expectations.”

 

Threats loom

The continued uncertainty of a viable vaccine and the lack of a fiscal plan from the White House mean the onus remains on the Fed to keep policy as accommodative as possible for the foreseeable future.

 

Capitol Hill has yet to bring forward a feasible stimulus bill after the Democrat-run House of Representatives voted down the latest trillion-dollar bill.

 

Economists predict Powell and his colleagues will keep the messaging relatively vague for the moment, with markets reassured rates are unlikely to be raised from current historically low levels for a considerable period.

 

Daiwa Capital Market’s Michael Moran said: “While the upcoming meeting is likely to be underwhelming from a near-term policy perspective, we are hoping to learn more about the FOMC’s new long-run strategy. We suspect that Chair Powell will not offer much more than he did in his Jackson Hole speech on 27 August, but we expect reporters at his press briefing to push hard for details.”

Fed long run FOMC projectiosn