The Federal Reserve’s rate decisions on July 29 will likely be remembered not for what is stated inside the policy communique. Rather, it will be long noted for what Fed Chairman Jerome Powell says at his news conference following the publication of the policy statement with respect to coming change in the Fed’s policy regime.
Change is coming at the Fed and we expect the July meeting to kick off a lively two months of discussion.
In our estimation, both the statement and the news conference the follows the two-day Federal Open Market Committee meeting should be understood as a period of transition for the Fed.
The Fed is challenged with creating the conditions for a policy path that will permit the central bank to respond to a wide range of possible outcomes around the evolution of a severely impaired economy, within the context of the pandemic, and constraints imposed by the polarization of the political sector.
We anticipate that Powell will use his news conference to lay the groundwork for the upcoming September meeting. At that meeting, we expect a shift in the policy regime toward an average inflation targeting, which should put significant downward pressure on longer-term interest rates following the 18-month review of central bank policy.
Alternatively, should the Fed choose not to move toward average inflation targeting, we would expect a large and quick pace of asset purchases in tandem with a yield curve cap out to the three-year maturity spectrum.
Either way, change is coming at the Fed and we expect the July meeting to kick off a lively two months of discussion over the direction of monetary and interest rate policy in the coming years.
We think that the news conference and the Fed talk that follows the meeting will begin to set expectations for the public and market participants that the evolution of policy will be tied to inflation outcomes, which we expect will remain quite low for a long period of time.
We do not anticipate major changes made to the policy statement in July as the committee will most likely choose to hold off until the September meeting, when a new summary of economic projections will be introduced in addition to the changes to the Fed’s policy regime.
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