Amid virus spikes, Fed may signal low rates

Central bank expected to keep average inflation goal at 2%

With at least 20 states pausing or reversing reopening plans amid coronavirus case spikes, the Federal Reserve could signal this week that it’s moving toward an even more market-friendly strategy centered on near-zero short-term interest rates for years, economists say. At a two-day meeting that began Tuesday, the central bank may take take steps to push long-term rates even lower. The Fed would seem hard-pressed to convey a more aggressive recession-fighting stance than it did last month. At a news conference after a meeting, Fed Chair Jerome Powell proclaimed, “We’re not even thinking about thinking about raising rates.” And Fed policymakers forecast that the central bank’s first rate hike won’t occur until at least 2022. Since then, however, nearly half the states, including Texas, Arizona, Florida and California, have suspended or rolled back business reopening plans by re-closing bars or making other moves to combat infection surges. The number of hours worked in several of those states has declined, according to Homebase, a supplier of employee scheduling software. And initial unemployment claims, a measure of layoffs, rose the week ending July 18 for the first time since March. After the U.S. recouped about a third of the 22 million jobs lost early in the crisis in May and June, a sizable portion of those gains could be wiped out in July, says economist Kathy Bostjancic of Oxford Economics. “With the recent stalling of economic activity and rising risks of a double dip recession, we look for Chair Powell to retain a very cautious outlook,” Bosjancic wrote in a note to clients. The economy plunged into its steepest-ever recession in the second quarter, with a report this week forecast to show gross domestic product declining at a more than 30% annual rate. Recent economic data show the economy partly digging out of that hole the past couple of months, but analysts see growing risks of a slide back into recession after the virus spikes forced states to partly shut down again. Neither Morgan Stanley nor JPMorgan Chase expects any noteworthy changes to the Fed’s postmeeting statement, which vows to keep its key rate 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.” The Fed has been reviewing its monetary policy tools and is expected in coming months to revise its 2% annual inflation goal by aiming for “average” inflation of 2% over time. Since inflation has been stuck below 2% for years, that suggests Fed policymakers will keep rates low enough to allow inflation to run above 2% to make up for low-inflation years. That would ensure the public expects 2% inflation over the long run, Goldman Sachs wrote. The Fed is likely to announce that change at its September meeting, Morgan Stanley says, allowing the central bank to promise to keep rates near zero until inflation climbs above 2%. That’s significant, because Bostjancic doesn’t expect inflation to reach the Fed’s 2% long-run goal and the return of full employment for another four years. Goldman Sachs believes those targets won’t be met until 2025. Several of the economists predict the policy change will be adopted in September or November, though Bostjancic says it could occur this week. Yet even if the Fed waits, economists say Powell could well signal the change on Wednesday. The Fed also is likely to nudge long-term rates lower. The central bank has been buying $80 billion a month in Treasury bonds and $40 billion in mortgage-backed securities, chiefly to resuscitate markets for those assets that had frozen during the crisis.

“With the recent stalling of economic activity and rising risks of a double dip recession, we look for Chair Powell to retain a very cautious outlook.” Kathy Bostjancic, Oxford Economics