The FOMC April 28 meeting minutes provide some glimpse into the Federal Reserve’s early assessment of the crisis triggered by the coronavirus pandemic, the outlook for the US economy over the coming months and quarters. Fed Chair Powell testimony on May 19 before the US Senate Committee on Banking, Housing and Urban affairs offers additional insights into the Fed’s current thinking and options to contain the economic impact of the coronavirus crisis and to speed-up the recovery of the US economy.
- The prospect of a V-shaped recovery is quietly moving from being the Fed’s baseline scenario to the least probable outcome as the risk of secondary pandemic outbreaks is increasingly considered as possibility
- The exceptional fiscal support enacted in the CARES Act and other legislation might help contain the short term economic damage stemming from the sanitary crisis and the related containment measures but this might not be enough and further fiscal support might be needed
- This will be the case if some of the measures and programmes contained in the CARES Act do not provide sufficient, appropriate and timely support for the most vulnerable households and businesses
The dwindling prospect of a V-shaped recovery
Fed staff observed the extremely elevated level of uncertainty surrounding the economic effects of the coronavirus outbreak and the limited guidance provided by the historical behavior of the U.S. economy to past economic shocks..
Fed Staff and other Participants to the meeting acknowledged that the lock-down and social distancing measures implemented in March-April had already caused severe damage to US GDP and to the unemployment rate, which reached the highest levels of the post–World War II period.
In addition, as can be read from the minutes, the probability of a V shaped recovery for the US economy which has been the Fed’s baseline at least up to the April 28 FOMC meeting nseems to dwindle with every passing day. Indeed, Fed Staff acknowledged that a second wave of the coronavirus outbreak might hit the United States next winter, leading to a more severe and protracted disruption to economic activity in this scenario, with real GDP and inflation lower and the unemployment rate higher by the end of the medium-term projection.
As participants to the FOMC meeting noted,
the effects of the coronavirus outbreak and the ongoing public health crisis would continue to weigh heavily on economic activity, employment, and inflation in the near term and would pose considerable risks to the economic outlook over the medium term.
Participants were further concerned that even after social-distancing requirements were eased, some business models may no longer be economically viable, which could occur, for example, if consumers voluntarily continued to avoid participating in particular forms of economic activity.
The potential need for greater fiscal support
Participants to the meeting also noted that recently enacted fiscal programs were crucial for limiting the severity of the economic downturn ,especially the CARES ACT and other legislation which represented more than $2 trillion in federal spending, but even greater fiscal support may be necessary.
Our take: In view of the later observation, it should be reminded that over the course of the last three weeks, following the hitherto referred last FOMC meeting, there has been an intense political shuttling between Democrats and Republicans about the contour of a second fiscal support program. The Democrat controlled House eventually passed a new support bill worth $3 trillion but this was rebuked by GOP controlled Senate and White House which called for a pause to allow earlier passed coronavirus spending to work.
The debate over forward guidance
In this meeting as in previous ones, several participants hinted at potential changes to the Fed”s monetary policy framework in favour of more explicit forward guidance.
Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit. For example, the Committee could adopt outcome-based forward guidance that would specify macroeconomic outcomes—such as a certain level of the unemployment rate or of the inflation rate—that must be achieved before the Committee would consider raising the target range for the federal funds rate. The Committee could also consider date-based forward guidance that would indicate that the target range could be raised only after a specified amount of time had elapsed. These participants noted that such explicit forms of forward guidance could help ensure that the public’s expectations regarding the future conduct of monetary policy continued to reflect the Committee’s intentions.
Our take: The discussion about forward guidance might be warranted in normal times but one wonders wether this debate is not a wasteful distraction of resources in the current context.
Insights from Fed Chair Powell testimony before the US Senate
Alongside Treasury Sec Steve Mnuchin, Fed Chair Jerome Power testified on May 19 before the US Senate Banking Committee during the first Congressional quarterly hearing held to monitor the implementation of the CARES Act.
Supporting documents and audio/video recordings