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Will the Fed Clarify Forward Guidance?

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The Federal Open Market Committee (FOMC) meets on July 28-29. Most are expecting the Federal Reserve to stand pat as participants debate when and how to explain forward guidance and implement yield curve controls.

The events of recent weeks have changed my view on forward guidance. Now is the time to clarify the Fed’s position on forward guidance, which means being explicit about holding interest rates near zero until the economy actually overshoots on its 2% inflation target.

Why now instead of in September as most are expecting? The resurgence in hospitalizations and deaths due to COVID-19 is taking a toll on growth. Consumer spending has, at best, hit a plateau. Employment may have actually contracted in recent weeks.

The U.S Census Bureau has been conducting a weekly Household Pulse Survey since the onset of lockdowns in March. That shows we may have lost 6.7 million jobs between the June employment report and the survey week for the July employment report. The data on continuing unemployment claims, which have a longer lag, is somewhat better but the improvements we saw in May and June appear to be waning.

This is at the same time that Congress has stalled in debate over a new aid package. The Senate is not expected to send its version to the House of Representatives until next week. This ups the ante that expanded unemployment benefits, which expire on July 31, could lapse. Nearly 30 million workers would be hit, affecting their ability to cover basic expenses including food and shelter. Some worry that Congress will not come up with a plan before the recess scheduled for August 7. This is the rare time when I actually hope election-year politics and Congressional propensity to spend dominate the agenda.

Separately, members of the FOMC have been humbled by what they learned about inequality during the last expansion. They realized the Fed could do more for low-wage and marginalized workers by allowing the unemployment rate to fall much lower than previously thought. That could be accomplished by waiting for inflation to actually heat up for a bit instead of preempting inflation with rate hikes tied to the unemployment rate.

There are some on the Fed now who would rather wait to act until economic conditions further deteriorate. I would err on the side of caution and do more now, given the speed with which economic losses arise and compound. We face mounting risks when school reopenings and the onset of the flu season coincide with an expected second wave of the virus.


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