After an emergency meeting of Federal Reserve policymakers in mid-March, chairman Jay Powell expressed confidence in the central bank's ability to shield the US economy from the most devastating consequences of the coronavirus pandemic.
“We think we have plenty of policy space left, plenty of power left in our tools,” he told reporters.
Six weeks later the Fed has deployed more firepower than it did during 2008 - including asset purchases, expanded lending facilities and swap lines with foreign central banks. Yet the economic outlook remains hazy, with 26 million Americans having filed claims for unemployment benefits.
Here are five things to watch as the Fed chairman and other members of the Federal Open Market Committee (FOMC) meet on Tuesday and Wednesday, this time for a regularly scheduled gathering.
Is Powell still optimistic about the second half?
Given the unprecedented situation facing the central bank as coronavirus spread across the US last month, Fed officials refrained from providing their usual economic forecasts at their last FOMC meeting.
Mr Powell offered a glimpse of what he expected in an interview with NBC television in late March, saying output was likely to decline substantially in the second quarter before bouncing back in the second half of the year.
Although the Fed will not release formal projections until June, financial markets will be watching for clues as to whether Mr Powell still expects a second-half rebound, given the oil price crash and other economic fallout from the pandemic over the past few weeks. In addition Mr Powell has suggested the virus needed to be under control before the economy could be reopened, so any update on his thinking will be important.
Any new guidance on rates?
In March the FOMC said it would keep US interest rates close to zero until officials were “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”.
Mr Powell has ruled out negative rates for now, saying they would not be appropriate for the US, so the question is whether the Fed will want to firm up or clarify that statement. A move towards very specific forward guidance - for example, tying zero interest rates to a given unemployment or inflation level - might to too much to ask, but any step in that direction, or hint of internal debate on the issue, would be significant.
Some economists have suggested the Fed could tweak the interest it pays on excess reserves from its current level of 10 basis points, but that would be more of a technical change than a policy shift.
Will there be more tapering?
On March 23rd the Fed lifted the cap on the amount of US Treasury bonds and mortgage-backed securities it would buy, after a pledge to purchase at least $700 billion (€645 billion) proved insufficient to address strains in both markets.
For weeks the Fed bought at a pace of $75 billion Treasuries a day, helping to expand its balance sheet to more than $6tn. It has since slowed its purchases, as trading conditions in the world’s largest government debt market have stabilised and the disruptive price swings seen in March have ebbed.
The New York arm of the central bank now buys an average of $10 billion Treasuries each day, or approximately $50 billion for the week ending May 1stThat is still a significant sum, but a marked decrease from previous levels.
Investors would like additional clarity on the Fed’s appetite. The central bank has suggested it will adjust its programmes according to market conditions, so few investors see the Fed ending its interventions altogether as long as the coronavirus outbreak rages on.
"The Fed is tapering because market functioning has improved," said Michael Gapen, chief US economist at Barclays in New York. "If somehow market functioning was to deteriorate, they could ramp those purchases back up."
Any tweaks to the credit plans?
As financial markets convulsed last month, the Fed unveiled a series of emergency measures to alleviate stresses in most asset classes, including facilities to support the $1.1 trillion commercial paper market, used by companies to raise short-term cash, as well as the corporate debt market.
The Fed’s historic decision to support riskier issuers by buying junk-bond exchange traded funds came alongside an unprecedented promise to purchase up to $500 billion of short-dated debt directly from US states and some counties and cities.
The central bank expanded the scope of its municipal bond facility this week, but investors do not expect additional changes to any of the proposed programmes at the meeting. Instead, they think the Fed will focus on getting all of the facilities up and running, since only a handful are operational so far.
Andrew Hunter, senior US economist at Capital Economics, sees this meeting as an opportunity for the Fed to “take stock” of its efforts to date, rather than roll out additional support.
Is there a message for Congress?
Fed officials have consistently noted that during a time of economic duress, the fiscal response is just as important as monetary policy - and have signalled as much to congressional leaders and the White House.
But now that multiple rounds of stimulus, totalling more than $3tn, have been agreed, the calculation for the Fed might start to get trickier. There is almost certainly a case for more fiscal support, but there are also emerging concerns about the US fiscal position given the unfolding crisis-era spending spree - which Mr Powell may want to address. – Copyright The Financial Times Limited 2020
