Fed faces viral wave, mounting risks to recovery
WASHINGTON: In a fast-changing global pandemic, this was not the turn US Federal Reserve officials hoped for in early June, when their forecasts showed guarded optimism for a sharpish early economic rebound and steady slow growth to follow.
In the ensuing seven weeks, much has gone downhill.
The coronavirus pandemic has intensified and prompted new economic restrictions. Data has pointed to a possible slowdown in business and hiring. And so-far stalled talks in Washington about further government relief have pushed the country to the brink of a spending cliff.
The risks to the US recovery, in short, have grown substantially, and the new Fed policy statement will show just how seriously US central bankers assess them. On Tuesday the Fed already made one nod to the outlook, extending from September 30 to December 31 the availability of the emergency credit programmes it set up early in the pandemic when hopes of a quick “V” shaped recovery were still strong.
Fed officials “always feared a rushed reopening would lead to a virus resurgence that would cap the recovery”, said Krishna Guha, Vice Chairman of Evercore ISI. Now that the disease has raced back over the summer, the Fed “is grappling with whether this is a short-term or longer-range setback and what the implications are for its policy”.
No new economic projections will be issued at this meeting.
Nor is the Fed expected to announce any major policy decisions. Officials may point to a pending shift this fall in how it views its inflation target, or begin setting explicit goals for the jobless rate or inflation to be met before it considers raising interest rates from the current near-zero level.
That goal-based guidance seemed to be favoured by policymakers according to minutes of the June Fed meeting, and several Fed analysts have said they expect it to be announced at the September Federal Open Market Committee session.
But with a dozen new programmes rolled out since March to fight the economic fallout from the pandemic, the Fed is now watching to see how the economy and events evolve.
Those measures were meant largely as emergency support for an economy that likely registered a historic nosedive in the April through June quarter. First estimates of growth in gross domestic product for that period will be issued on Thursday, and the median estimate of economists polled by Reuters is for an annualised decline of 34 per cent.
In addition, recent data suggest the hoped-for rebound, which started with an unexpected round of hiring in May and June, may have plateaued - a motivation for the Fed’s extending its emergency programs at least through the end of the year.
The official jobless rate fell from 14.7 per cent in April to 11.1 per cent in June, for example, but a survey by the Dallas Federal Reserve since then, as well as a new employment forecast by the St Louis Federal Reserve, both suggest employment dipped this month. Last week new claims for unemployment insurance rose for the first time since March.
“The spike in virus cases is indeed sucking the oxygen out of the robust economic recovery” that seemed to be taking shape in May and June, wrote Bank of the West chief economist Scott Anderson in a July 24 analysis.
— Reuters