Smart News - Last Fed meeting before the US election
Last Fed meeting before the US election
Today sees the US Federal Reserve conclude its two-day monetary policy meeting. This is a significant event for a number of reasons. Firstly, it will include a quarterly update of the Federal Open Market Committee’s (FOMC) Summary of Economic Projections. This is where committee members submit their forecasts for interest rates, unemployment, inflation and gross domestic product for each year up to 2023, together with a general longer term projection. Secondly, this is the first meeting since the Jackson Hole Economic Symposium last month where Federal Reserve Chair Jerome Powell announced a new approach from the central bank in managing inflation. The Fed has moved from a specific 2% inflation target to Average Inflation Targeting (AIT). In essence, this means the central bank is prepared for inflation to overshoot the 2% level for some time before it even considers tightening monetary policy. Thirdly, this is the last major Fed meeting before the US Presidential Election takes place in early November.
In previous years, it was generally accepted that the Federal Reserve would not want to make alterations to its monetary policy ahead of an upcoming election. After all, any change in the key ‘Fed funds’ interest rate, whether up or down, could be viewed as highly political. In 2016, the Federal Reserve under the chairmanship of Janet Yellen, held off from hiking rates until after the election and Trump’s surprise win. This was despite a strong view from many observers that rate rises were well overdue. Back then, it was less of a political issue than now as neither candidate was incumbent. But in the lead-up to the last election Trump had openly criticised the US central bank for its quantitative easing programme and loose monetary policy. On becoming president, in the face of a series of rapid hikes which took the Fed funds from 0.5% in November 2016 to 2.5% in December 2018, plus the significant reduction in the Federal Reserve’s balance sheet, Trump railed against Jerome Powell and threatened to sack him for ‘damaging’ the US economy. Did Mr Powell take note? Well, he performed one of the fastest U-turns in central bank history when - in the space of a few weeks between December 2018 and January 2019 - he went from indicating that further rate hikes were on the way to announcing that the era of monetary tightening was over. Whether this was pressure from Trump or the fact that the US stock market plunged by more than 20% in the last three months of 2018 is unclear.
What about this week’s meeting? The Fed funds rate is currently being held below 0.25%, which is effectively a Zero Interest Rate Policy (ZIRP), and back to the level seen between early 2009 and late 2015. Market analysts believe there’s no reason for a rate rise given the economic damage caused by the coronavirus and uncertainty about the future. At the same time, the FOMC has made it clear that it is against following the Swiss and Japanese central banks by taking rates negative. So, it’s fairly safe to say that the Federal Reserve won’t be making any significant changes to its key Fed funds rate.
Unfortunately, there are signs that the pace of economic recovery in the US is slowing. Recent unemployment data has disappointed as the furlough scheme ended and companies made substantial redundancies. As a consequence, there are calls for the Fed to inject more stimulus. It can do this by indicating that it is open to expanding the size and scope of its asset purchase program, while extending the anticipated period that interest rates will remain around the zero-bound. Is that likely now? Possibly. The central bank could provide looser forward guidance in light of poorer economic data and on fears of second wave of coronavirus. But it may prefer to keep its powder dry and instead try to pull the focus back to its forecasts for economic growth and unemployment in its summary of projections.
These are likely to show an improvement from June’s numbers which were perhaps overly pessimistic in hindsight. But the central bank will also want to keep the pressure on policy makers to do their bit by agreeing to significant programmes of fiscal stimulus. This is likely to be a topic during Jerome Powell’s press conference where he could address the current stalemate in Congress concerning fiscal measures. The trouble is that it’s difficult to see anything substantive being agreed ahead of the November election, particularly as some short-sighted politicians equate US stock markets trading near record highs as evidence of US economic strength.
But the country desperately needs a new relief package as the original fiscal measures expire and as companies announce large redundancy programmes. In the meantime, monetary stimulus and the search for investment returns in a low-yield world continue to drive money into a stock market which is significantly overvalued by many measures. But investors feel confident that the ‘Fed’s got their backs’ while initial public offerings, mergers and acquisitions provide specific investment targets, while fuelling a general feeling of confidence.
So, what can we expect from the Fed on Wednesday? Perhaps some upgrades to its forecasts for growth and employment together with the assurance that there will be no rise in interest rates for a few years yet. As far as its dual mandate is concerned, it’s likely the US central bank will emphasise the importance of maximising employment over keeping inflation in check. In the meantime, the countdown to the Presidential Election begins in earnest and traders will start paying increasing attention to the pollsters. We’ll have much more on that in the coming weeks. To make sure you’re on top of all the news that matters, click on our Smart News widget which you can find in the bottom right hand corner of the trading platform. This is where you’ll get your curated news first, along with the opinions of some of the most influential voices on social media.