WASHINGTON DC: After a year in which the Federal Reserve made unprecedented loans to support the economy while pushing for government stimulus measures that never came, central bankers may show the first signs of optimism this week next.
The Federal Open Market Committee (FOMC) charged with setting policy will open its final meeting of 2020 on Tuesday, wrapping up a year that has seen the world’s largest economy contract massively due to coronavirus disease 2019 (Covid-19) and Joe Biden oust President Donald Trump in the November presidential election.
The Fed and its chairman Jerome Powell will likely avoid making any political statements as usual, but experts say they will likely update their take on how the economy will fare in 2021 as the vaccines against the virus will be deployed.
However, the outlook is not entirely clear.
“It’s actually quite a difficult FOMC to analyze,” said Steven Englander of Standard Chartered Bank. “Putting the pieces back together is going to be more complicated and will seem a little more complicated in six months than today.”
Above the meeting looms the continued failure of Congress to pass another spending program to help the economy recover from the Covid-19 downturn – something Powell and other central bankers kindly have them but constantly urged to do for months.
Powell will hold a press conference after the meeting ends on Wednesday, but beyond more incentive, there is little he can do to close the so far insurmountable gaps between Democratic and Republican lawmakers, said Rubeela Farooqi of High Frequency Economics.
“He’s going to sound a concerned and cautious note on what’s going on with the economy, but I don’t expect him to take a firm tone on what needs to be done on fiscal policy,” a- she declared.
The central bank cut its lending rate to zero when the pandemic hit in March and recently unveiled a new inflation targeting policy that will ensure the benchmark lending rate stays lower for longer to maximize employment.
The Fed has also deployed trillions of dollars in loan and liquidity lines to keep markets functioning, as business closures to stop transmission of the virus have stressed the economy.
Some of the loans were guaranteed by government funds, and a controversy erupted last month when Treasury Secretary Steven Mnuchin asked the Fed to return hundreds of billions of dollars in unused loans, shutting down several loan programs, sparking a unusual public protest from the central bank. .
Democrats accused Mnuchin of trying to tie the hands of Biden, who will take office in January, but Englander said Powell and the policy-averse Fed likely wouldn’t tackle the issue further.
What about bonds?
With no stimulus and hands tied with more lending, the analyst will monitor whether the Fed implements plans to change its bond buying strategy, which officials discussed at their meeting. November.
The Fed has bought massive amounts of debt and increased purchases of longer-term Treasury securities could provide additional stimulus to the economy.
But Englander predicted that the Fed will use the meeting to focus primarily on reinsurance.
“The ideal would be if they could get away with not doing much and certainly not doing much that would reveal divisions within the FOMC, but that would convey to the market in an emergency, or any sort of situation. stress, they’re going to be there, ”he said.
The Fed will also release its quarterly summary of economic plans at the meeting, which will give an indication of how policymakers view the outlook over the next three years, taking into account recent good news on vaccines.
More bullish growth forecasts could scare stock markets amid fears that the Fed will remove the stimulus sooner than expected, Wells Fargo Securities said in an analysis.
However, the FOMC will likely continue to “signal that it will not be in a rush to raise the federal funds rate,” Wells Fargo said.