Fed Minutes Show Stimulus Worries

The latest United States Federal Reserve’s Federal Open Market Committee (FOMC) meeting minutes showed on Wednesday that monetary policymakers are concerned about the absence of another stimulus package, with fears that this could downplay the economic recovery.

However, recovery was seen moving faster than expected, according to the minutes of the September 15-16 meeting, which saw the FOMC maintains interest rates steady near 0%.

“Many participants noted that their economic outlook assumed additional fiscal support and that if future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated.”

“The absence of further fiscal support would exacerbate economic hardships in minority and lower-income communities.”

“Most participants supported providing more explicit outcome-based forward guidance for the federal funds rate that included establishing criteria for lifting the federal funds rate above the [0-0.25% range] in terms of the paths for employment or inflation or both.”

“However, with longer-term interest rates already very low, there did not appear to be a need for enhanced forward guidance at this juncture or much scope for forward guidance to put additional downward pressure on yields.”

It is worth noting that during that meeting, the Fed reiterated its commitment to do what is necessary to help the US economy recover from the worst recession in years.

Members of the Federal Open Market Committee (FOMC) vowed to aim for the inflation rate to go above 2%, in line with the new policy framework.

In addition, FOMC pledged to maintain current policies even if unemployment continued to decline.

The Federal Reserve now expects the American economy to recover from the impacts of the coronavirus (COVID-19) crisis as the unemployment rate is declining faster than the Fed previously expected in its June statement.

The Fed projects the US economy will contract by 3.7% in 2020, compared with its previous expectation of a 6.5% contraction, while the unemployment rate is expected to reach 7.6% by the end of the year, before reaching 4% by 2023, the year in which the consumer price index (CPI), or the inflation rate, is expected exceed the 2% level.

This was the first meeting for the US monetary policymakers after adapting the new framework, which allows inflation to go above 2%.

It was also the last Fed meeting ahead of the upcoming US Presidential Elections on November 3.

In the press conference following the release of the policy statement, the Fed Chair Jerome Powell said that FOMC is not out of tools to face the impacts of the COVID-19 crisis.

Nevertheless, the vote was not unanimous this time, with Robert Kaplan and Neel Kashkari voting against the action.

Kaplan expects that it will be appropriate to maintain the current target range until the FOMC is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement. He prefers that the FOMC retain greater policy rate flexibility beyond that point.

Meanwhile, Neel Kashkari, who prefers that the FOMC indicated that it expects to maintain the current target range until core inflation has reached 2% on a sustained basis.

Earlier today, Kashkari told CNBC that “there are enormous consequences” for failing to provide another relief package.

“If we do not support people who have lost their jobs, then they can’t pay their bills and then it ripples through the economy and the downturn is much worse than it needs to be.”