Framework complete, Fed faces election year call on next steps

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Framework complete, Fed faces election year call on next steps

WASHINGTON: With a new policy framework in place, the Federal Reserve will turn to discussion of its next steps in the fight against the economic fallout of the coronavirus pandemic, and if and when to roll out additional support.

Fed Vice Chair Richard Clarida said on Monday that following release of the Fed's new long-run strategy last week, policymakers "will be returning to a discussion of potentially refining guidance and our balance sheet communication," the Fed's now staple recession-fighting tools involving promises about future policy and the pace of monthly bond purchases.

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Clarida, during an event organised by the Peterson Institute for International Economics in Washington, did not indicate how quickly that debate may be resolved, saying "I dont want to prejudge where that would end up."

However the debate presents the central bank with an immediate challenge: Whether to announce those widely anticipated next steps at its September policy meeting, its last before the November presidential election, or wait.

Some analysts have urged the Fed to act soon in order to show it is serious about the new strategy it laid out last week, trading the risk of higher inflation for stronger job growth, and argued that without such follow-up steps the new strategy seems hollow. But even they have noted the complications of acting in the midst of an election that may hinge on voter perceptions of the pandemic economy.

"It is awkward for the Fed to make a big decision either in September…or in November – immediately after the vote, with the (Federal Open Market Committee) potentially appearing political either way," Evercore ISI vice president Krishna Guha wrote in an analysis, judging it a close call whether the Fed will announce new policy decisions in September or not.

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The Fed in September of 2012 did announce its third and most open-ended program of bond purchases used to fight the last crisis, and was promptly pilloried by Republicans alleging the central bank was trying to fuel a sluggish recovery and help President Barack Obama's re-election that November.

This time around, the Fed in March slashed interest rates to zero and announced a long list of credit programs meant to halt a meltdown in financial markets and provide loans to an array of businesses, earning praise from President Donald Trump who through the previous fall had sharply criticized Fed policymakers and called Fed Chair Jerome Powell an "enemy."

DO MORE, BUT WHEN IT HELPS

The Fed is widely expected to do more at some point, but Fed officials in recent weeks have indicated they don't want to commit to a course of action until the direction of the health crisis and recovery become clearer, and their policies may have more impact.

Actions like expanding bond purchases would aim to hold down the longer-term interest rates critical for home mortgage, auto and other markets – but those rates are already low. The Fed is currently buying $120 billion monthly in Treasury and mortgage-backed assets, and may at some point pledge to keep that amount in place until full employment is reached, or increase it.

In addition, with investors already anticipating the Fed will hold its target policy rate near zero for years, there may be little value in making more explicit promises about rate hikes until years down the road, if and whRead More – Source

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