The Federal Open Market Committee (FOMC) kept policy unchanged at the conclusion of its meeting today. The statement regarding the economy was slightly more worrisome than it was when the Fed last met in September. The FOMC is worried about how deep the hole left by COVID remains, as COVID cases and hospitalizations are both surging. Consumer confidence faltered again in October, while high-frequency data on credit card usage suggests that consumer spending stalled during October.
Initial unemployment claims remained above the one million mark when special pandemic insurance is added to the mix for the week ended October 31. That compares with just 212,000 initial unemployment claims the same week a year ago. Continuing claims continued to fall but at a slower pace than we have seen in recent weeks. That suggests that the pace of job growth is slowing. The risk is that employment could actually drop again in November as traditional holiday celebrations are scaled back or cancelled entirely. Travel and tourism will also be hit, especially during the Thanksgiving holiday, which is typically a peak travel time.
Chairman Jay Powell highlighted the concerns that the FOMC continues to have with regard to the economy. Committee members are particularly worried about the recent resurgence in new cases and the fact that overall economic activity has slowed again in recent months. He noted that the Fed will continue its asset purchases “at least” at the current pace of $120 billion per month ($80 billion in Treasury bond purchases and $40 billion in mortgage-backed securities). This opens the door for the Fed to increase the pace of asset purchases in December, especially if Congress fails to come together on a new stimulus package.
Powell continued his plea for more fiscal stimulus to help contain the spread of the virus, manage infections more effectively and to offset the blow to the economy associated with the lapse in fiscal stimulus over the summer. Powell acknowledged that he is worried about scars that the wounds inflicted by COVID could leave on the labor market and the overall economy. He argued that the pace of the recovery depends heavily upon more fiscal stimulus.
Powell refused to say that the Fed is running out of tools to further stimulate the economy, though he was asked directly. He is clearly looking at ways to expand the balance sheet to provide more support for the economy and lending capacity. He repeated his mantra that the Fed can lend, not spend. Lending is not the most effective way to counter the costs inflicted on the economy by the pandemic. The Fed cannot ramp up testing, tracing and treatment or provide direct support to households, businesses or state and local governments that suffered a blow to their finances in response to COVID. When pressed, Powell repeated that “It takes the whole of government including health care and fiscal - all of government working together.”
Powell remained optimistic that Congress will provide some level of additional stimulus. Senate Majority Leader Mitch McConnell announced his willingness to do a smaller deal than Treasury Secretary Steven Mnunchin and House Speaker Nancy Pelosi have been negotiating. We are not expecting anything to happen until after the next president is sworn in. The longer we wait, the more we may need.
Powell also announced changes to the release of the Fed’s forecast, starting with quarterly updates in December. The goal is to provide the public and financial markets with a better understanding of the uncertainty facing the Fed, the dispersion of forecasts by different participants and how risks to the forecast are stacking up.
Look for more asset purchases by the Fed at year-end. The surge in economic activity we saw in late spring and early summer was not enough to fill the hole left by COVID. Risks to the downside are mounting. Fiscal policy is better suited to deal with the challenges the economy continues to face but the Fed will do more to support the economy.
Note: Powell is more likely to be renominated as Fed Chairman by Vice President Joseph Biden than he is by the incumbent in the White House. Powell was originally nominated to the Federal Reserve Board by President Barack Obama because of his work with the Bipartisan Policy Center. The president has been working to nominate a Federal Reserve Governor who could replace Powell; he would likely choose someone else who is more loyal to the administration.
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