The U.S. economy has largely moved sideways with a downward tilt over the past month as pent-up demand waned and lower- and middle-income households pulled back on spending in anticipation of a reduced pace of fiscal aid.
Policymakers and firm managers should prepare for a much longer public health crisis that results in an impaired economy.
The Federal Reserve used its policy statement and Chairman Jerome Powell his news conference on Wednesday to underscore its ultra-cautious outlook and to reiterate its view that the pandemic is the primary driving force within the economy.
Absent an easing of the pandemic, or the development of a vaccine in the near term, there is a real risk that the domestic economic rebound will continue to stall, creating the conditions for another downturn.
Yet the Federal Reserve chose to hold its fire and provided no further accommodation at its July meeting even though companies have not been recalling as many workers and household consumption has slowed as the pandemic intensified in June and July.
The Federal Open Market Committee maintained its policy stance, leaving the policy rate at a range between 0 and .25%, and interest on excess reserves at 0.10%. It also kept in place the pace of asset purchases at $80 billion per month in U.S. Treasuries and $40 billion in agency mortgage-backed securities.
The key phrase in the policy statement: “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” “V’ stands for vaccine, not the shape of the recovery.
We have made the case that until there is a vaccine, there will not be a meaningful recovery. The July FOMC policy statement and the Fed’s extension of its pandemic-era crisis facilities until the end of the year affirm that outlook.
Forward-looking policymakers and firm managers should prepare for a much longer public health crisis that results in an impaired economy in the medium term.
At the September meeting, we expect a shift in the policy regime toward average inflation targeting, which has put downward pressure on longer-term interest rates over the past week in anticipation of such a move following the 18-month review of central bank policy.
Alternatively, should the Fed choose to not move toward average inflation targeting, we would expect a larger and quicker pace of asset purchases in tandem with a yield curve cap out to a three-year maturity spectrum.
Either way, change is coming at the Fed, and Powell’s news conference signaled that the Fed is preparing to move on policy this fall.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.