Fed: No Surprises or Changes

The Federal Reserve left interest rates unchanged at 0% - 0.25% and left all its other existing lending programs unchanged as well, clearly indicating that the economy will need all the monetary support possible for the foreseeable future. The outcome had been widely expected.  There were few substantive changes in the accompanying statement, but the Fed did acknowledge that the economy still had a long way to go to completely recover, saying that, “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year...”  And the Fed pointed squarely at COVID-19 as largely driving policy, saying, “The path of the economy will depend significantly on the course of the virus” and as a result, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events…”

In a related note, yesterday the Fed extended the deadline for its array of new lending programs from the end of September to the end of December. Clearly, the Fed is concerned that COVID-19 could drive demand for those programs at least later in the year, and they are probably right. As shown in the charts below, new cases are remaining stubbornly high, while new deaths continue to rise.

The U.S. COVID-19 situation as of Tuesday, July 28th

There was no mention of two other potential tools the Fed could use, which are “yield curve control” to target interest rates of specific maturities, and “forward guidance” which could help markets and policy-makers better understand the Fed’s future plans to manage the economy.

Overall, the statement supported the Fed’s approach to supporting the economy through monetary policy: “We are here to do whatever it takes, for as long as it takes, and we have all the money anyone will need.”

Throughout the post-meeting press conference, Powell frequently repeated that fiscal stimulus had been effective and that more was needed.  Republicans and Democrats are currently negotiating another round of stimulus including the possibility of more $1,200 direct payments and extended unemployment benefits. Powell would clearly like it done before Congress breaks for the summer recess on August 10^th.

Tomorrow morning at 8:30 the government will announce Q2 GDP.  The whole world knows that it will be a terrible number, somewhere between -25% to -40% q/q at an annualized rate.  It’s important to keep in mind that this data is in the rear-view mirror as it reflects what has happened over the past three months, and we already know that was disastrous, and we know that’s behind us.