The Federal Open Market Committee (FOMC) is expected to leave monetary policy unchanged at its July meeting, although some analysts are anticipating the Fed will move to more dovish rhetoric, laying the ground for September meeting.
At previous meetings, the Fed embarked in unlimited Quantitative Easing (QE) and expanded its balance sheet aggressively. These measures, in combination with unprecedented fiscal action, were aimed at mitigating the impact of the COVID-19 pandemic on the economic activity.
Fed Chair Jerome Powell has said they are “not even thinking about thinking about raising rates,” while the June’s dot plot shows no hikes are foreseen until at least 2022.
So what can we expect from July 28-29 meeting?
It seems that this will be a transition meeting, with the can being kicked to September when the Federal Reserve will also release new projections for the economy and the funds’ rate. However, the Fed could reiterate its commitment to do more in order to keep the recovery on track.
“With markets functioning well and longer-dated yields remaining at such low levels, the Fed has little need to alter its language or stance at this stage. Given this backdrop, particularly as we await the outcome of negotiations over another fiscal stimulus, the Fed will retain their cautious language on the recovery and will leave the Fed funds target rate unchanged at 0-0.25% with no change to their QE stance,” said James Knightley, Chief International Economist at ING.
Meanwhile, analysts at TDS think the Fed could formally adopt an average inflation targeting (AIT) framework, but they don’t see this happening until after September meeting. This would mean the central bank might allow inflation to run higher than 2%, and would ultimately imply looser for longer.
Not only higher rates are off the table, Jay Powell has also downplayed expectations of negative rates. Still, there are some other tools available for the central bank. There seems to be a growing consensus that the Fed might implement yield curve control (YCC) later this year. Bond purchases could target long-term yields to prevent borrowing costs to rise too quickly.
However, with yields at historical lows already – probably in anticipation of YCC adoption – the Fed could take its time to implement such measures.
Ahead of the meeting, equity prices show good health, although they are not at record highs, and the Fed would probably like Wall Street to maintain the risk-on mood. The US dollar exhibits weakness not seen in months. Could the central bank offer something new?