Another Hold From the Fed?

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There is a universal consensus that the Fed will leave the interest rate where it is, but that doesn’t mean there aren’t other policy changes that could happen. We have  reason to think that the Fed might be worried about the economy. There could be some tension at the meeting that starts today and ends tomorrow.

It’s Not Just COVID

Of course, COVID is the dominant factor in any recent monetary policy discussion. But recent reports show that the US’ recovery after cases peaked in April might be stalling.

While case numbers have dramatically increased over the last month, death rates have not increased as much. Authorities have been loath to reimpose costly lockdowns.

Many in the market are calculating that massive lockdowns are a thing of the past. This is because the economic cost is too high for most governments. The result is asset inflation even as cases rise, with investors taking advantage of low-cost borrowing to buy anything and everything.

The question is whether that’s going to translate into increased costs for consumers, who are hesitant to spend money in the current environment.

The Numbers Don’t Look So Good

Last Thursday’s initial jobless claims showed an uptick in new unemployment filers. This suggests that the recovery is at least paused if not potentially turning downward.

Flash PMIs last week told a disjointed story: manufacturing beat expectations and returned to growth. But services – the sector most impacted by COVID – remained technically in contraction and well below expectations.

But, is it enough to push the Fed to change policy? Obviously, in the quotable words of Fed Chair Powel, the Fed is “not even thinking about thinking about” tightening policy. But, what about loosening it?

What We Are Looking For

The market seems to be talking itself into believing that the Fed will deliver some kind of change this week. However, the consensus among economists is that there won’t be any major changes after the meeting, rather that Powell will announce the changes are imminent. This might disappoint the markets, and support the dollar for a short period.

Why Not?

The Fed is very reluctant to make surprise announcements, and they have yet to conclude their revised Long-Run Monetary Policy Statement. Without giving the market a guidance framework, it’s unlikely they will initiate a policy change, such as more QE or yield curve control.

On the whole, we expect the meeting results to be uneventful. The majority of surveyed economists expect the policy statement to remain largely the same.

Powell is expected to use the press conference to discuss potential policy implications. This is similar to the last meeting but stop short of announcing any significant changes.

The consensus remains that the Fed will stay on hold until September.

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