Fed to Consider How Long to Stay at Zero Rates: Decision-Day Guide

Federal Reserve policy makers will consider penciling in interest rates near zero for this year and next to help the U.S. economy recover from its coronavirus-inducedrecession.

The Federal Open Market Committee is all but certain to keep its benchmark overnight rate in a target range of zero to 0.25% when it wraps up its two-day meeting on Wednesday. The committee will release a statement at 2 p.m. alongside its first quarterly forecasts since December, including a dot plot of its rate projections. Chairman Jerome Powell will hold a video press conference 30 minutes later.

Better-than-expected Mayunemployment data point to the economy being past the worst as it slowly reopens. But the Fed is not expected to signal it is anywhere near exiting from emergency policies to keep credit flowing as it monitors what officials have warned will be a slow road back to normal.

“People are very anxious to see what the policy projections look like,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, though Powell may emphasize uncertainty. “He is likely to stress this isn’t any kind of ironclad commitment. We’re very foggy on how things are going to play out.”

The FOMC is likely to project that it will raise rates only in 2022, according to economistssurveyed by Bloomberg, while some see no hikes before 2023 or later. The Fed’s last rate forecast in December had a median rate of 2.125% at the end of 2022. That outlook got swept away as the pandemic spread in March, with the Fed slashing rates including apercentage point emergency reduction on Sunday, March 15 ahead of a scheduled meeting which it cancelled.

Economic Projections

The FOMC also took the unusual step of suspending forecasts in March because of the virus uncertainty. Powell said at the time the projections would next be released in June.

Following May’s drop in unemployment to a still-staggering13.3%, the Fed might project the jobless rate as high as 10% by year-end, though some forecasts may be a bit lower reflecting last month’s surprise 2.5 million gain in payrolls.

Joblessness may be projected to decline over the following two years as the labor market heals, while inflation forecasts are likely to be lowered in light of the virus-led drop in economic activity, which has slammed oil prices.

“The Fed can have bleak forecast figures but soften the blow with upbeat rhetoric, and a longer-term outlook for recovery,” said Lindsey Piegza, chief economist with Stifel Nicolaus.

FOMC Statement

The FOMC may tweak its statement to reflect a somewhat better-than-expected jobs outlook, though the basic message will stay the same: The Fed stands ready to use its “full range of tools” to support the economy.

“The numbers are clearly encouraging and point to a bottom in May, but I still think the Fed will probably be very cautious in interpreting them,” said Roberto Perli, a partner at Cornerstone Macro LLC. The description of the economy in the first paragraph of the statement may become “a bit more optimistic.”

What Bloomberg Economists Say

“Bloomberg Economics does not anticipate any major new actions from the Federal Reserve at the June FOMC meeting. While policy makers may start to think preliminarily about the timing and type of economic conditions which would warrant curtailment of the current emergency programs, the discussion of the policy exit remains premature until the economy recovers closer to pre-crisis levels.”

— Yelena Shulyatyeva, Andrew Husby and Eliza Winger

Forward Guidance

The FOMC has said it would keep interest rates zero until the economy has “weathered recent events” and is on track for full employment and price stability. The committee could drop the language around navigating “recent events” while keeping the message dovish, said Jim O’Sullivan, chief U.S. macro strategist at TD Securities.

Some officials have also talked about making the rate path more explicit by spelling out certain economic outcomes — such as a certain level of the unemployment rate or of the inflation rate — that would trigger consideration of raising rates. Economists view such a shift as premature, though it might be on the table for the Fed’s September meeting.

Yield-Curve Control

The committee is likely to discuss clarifying Fed monetary policy intentions including targeting yields for some Treasury maturities, a policy known as yield-curve control. Economists expect the committee to adopt the tactic, but wait until September for an announcement. Cleveland Fed President Loretta Mester, an FOMC voter this year, has said it’s probably too early to expect a decision on yield-curve control at the June meeting.

Press Conference

Powell at his April 29 press conference made a strong argument in favor of additional spending by Congress to help offset the recession, then subsequently toned down his comments in a congressional appearance. Powell may need to step up his pressure again, said Diane Swonk, chief economist with Grant Thornton in Chicago.

“Powell has to urge Congress for more, especially for the states which were just dealt another blow due to social unrest and what could be a rise in Covid cases,” she said. “The revenue shortfall all states will feel will be compounded by the delays to reopening and fear triggered by social unrest and heightened risks of contagion.” Powell appears before the Senate Banking Committee on June 16.

Balance Sheet

The Fed is currently purchasing Treasuries and mortgage-backed securities “in the amounts needed” to ensure smooth market functioning. Analysts say the Fed is likely at some point — possibly this month — to reformulate the program along the lines of its large-scale bond buying from 2008 to 2014 to explicitly stimulate economic activity.

“Potentially the most impactful announcement to come out of Wednesday’s FOMC meeting is details on further quantitative easing,” NatWest Markets strategist John Briggs said in a June 5 report. He expects a monthly pace of about $100 billion in Treasuries and $80 billion in MBS.

— With assistance by Elizabeth Stanton

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