At its meeting yesterday, the Federal Reserve did not, as expected, adopt new monetary policy measures to combat the coronavirus crisis. The upper range of the key interest rate therefore remains at 0.25%. This time the focus was only on the statement and the press conference with Jerome Powell – new projections will not be published until the September meeting. And even the statement contained adjustments in only a few places: After massive declines, economic activity and employment increased again, but they were still significantly below the level at the beginning of the year. The expected economic development will largely depend on the spread of the virus. As was recently emphasized, the key interest rate level will be maintained until the country has weathered the effects of the corona virus. The buyout program with USD 80 billion US Treasuries and USD 40 billion MBS per month would remain “in the coming months … at least at this level”.
The subsequent press conference immediately opened Jerome Powell dovish with the comments that new lockdown measures that have become necessary are already beginning to put a strain on economic activity again. He announced that the monetary policy framework would be revised and completed in the near future. Without becoming specific, the so-called inflation targeting could be hidden – only if the, for example, 2% inflation mark was exceeded, would the Fed act again for the first time. We believe that this new strategy could be announced at the September meeting. Otherwise, Powell noted that the Fed “doesn’t even think about raising rates.” It is still a long way to go and the central bank will continue to do everything it can to support the economy.
First of all, the motto for monetary policy is to do everything possible to combat the crisis. Above all, however, it waits to see what fiscal policy can bring about. The negotiations in parallel in the Congress in Washington regarding the end of week support programs for employees affected by the corona virus appear to be almost more significant than the central bank meeting. Almost 30 million unemployed citizens then lose weekly government support of $ 600. While House Democrats want to continue this with a $ 3.5 billion program through January, Senate Republicans beat a $ 1 program in the Senate Billion a reduction to USD 200 per month plus increased testing. The difference amounts to almost USD 50 billion a month, a total of just under 1.5% of GDP. It remains in this pre-election campaign speculation whether and when and how often a “last minute deal” succeeds.
Conclusion: Less than 24 hours before the worst GDP decline in the United States was announced (today at 2:30 p.m.), the Federal Reserve announced no new measures to combat the coronavirus crisis at yesterday’s scheduled meeting. That was expected. Interest rates, the monthly purchase program and the forward guidance remain unchanged. Powell emphasized that the central bank would use all funds for as long as necessary and “do not think about raising interest rates”. However, he announced that he would soon revise the monetary policy framework. This could be the so-called inflation targeting – only if a certain inflation mark was exceeded permanently would the Fed act again for the first time in terms of interest policy. However, the Fed will probably now wait and see how the ambushing parties in the pre-election campaign in Congress reach a swift agreement on the support payments to employees affected by the coronavirus. If this does not work, Powell would have to open his box properly again and intervene creatively!
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