Powell to address need for stronger support

Jerome Powell and his Federal Reserve colleagues are staring down the possibility of mass bankruptcies and long-lasting unemployment unless there’s a more concerted government effort to shield the U.S. economy from the impact of the pandemic.

That’s the context in which the Fed chair will speak today at 9 a.m. during a virtual event with the Peterson Institute for International Economics in Washington, though he may be loath to give clear hints on future monetary policy, with the central bank’s next rate decision still a month out.

“Powell is likely to push back on adopting negative rates, reinforce his willingness to continue using balance sheet tools, and lean on fiscal policy makers to do more,” said Neil Dutta, head of economics at Renaissance Macro Research.

Powell and his colleagues on the central bank’s Federal Open Market Committee have already cut their benchmark interest rate to nearly zero, engaged in open-ended bond buying and begun rolling out emergency lending programs as U.S. unemployment has soared to levels not seen since the 1930s Great Depression.

But they’ve also insisted more can and probably will need to be done, both by the central bank and by lawmakers who have already backed $2 trillion in virus relief. Democrats on Tuesday proposed a further $3 trillion in aid, though the plan has little chance of gaining traction with President Donald Trump or Senate Republicans.

That still leaves a question about what future fiscal measures might look like, and whether anything more will be on tap for the FOMC’s next scheduled meeting on June 9.

Investors have begun to speculate that the Fed may opt to take its benchmark overnight rate into negative territory, following in the footsteps of central banks in Europe and Japan. Implied yields on futures contracts linked to the federal funds rate have gone below zero in recent days.

Fed officials have long maintained that they are not keen on imitating their Japanese and European counterparts, however, and continue to argue against adopting negative rates in the U.S.

“My colleagues on the Federal Open Market Committee have been pretty unanimous in saying we don’t think that’s likely,” Minneapolis

Fed President Neel Kashkari said Tuesday during a virtual event streamed on YouTube. “There are other tools we would go to first.”

More likely would be a move to a so-called yield-curve control policy. That would entail the central bank setting a target for yields on longer-term Treasury securities in addition to its overnight benchmark, and buying or selling Treasuries as needed to hit the target.

It’s something the Bank of Japan has implemented successfully in recent years, and something that Fed officials had been discussing as a possible crisis measure to consider down the road, before the coronavirus outbreak began.

The Fed already is buying lots of Treasuries. Since mid-March, it’s added about $1.5 trillion of them to its balance sheet. Initially, the stated rationale was to restore liquidity in financial markets after investor panic seized them up. Now, as market function improves, the Fed will probably continue buying but with the aim of keeping long-term yields low — harking back to the socalled quantitative easing programs it relied on last time its benchmark rate was at the zero bound.

A shift toward yield-curve control or a more structured approach to bond buying could ultimately be accompanied by clearer guidance on what would drive the Fed’s decision-making. The central bank’s current guidance is that its benchmark rate will remain pinned near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”