Policymakers at the US Federal Reserve are set to publish their first set of economic projections of 2020 later today when the Open Market Committee (FOMC) makes its June decision.
The Federal Reserve is widely expected to leave interest rates near zero at its FOMC June decision. But all eyes are on the meeting for indications of how the central bank will approach the next phase of its response to the crisis.
Here’s what to look out for at the Fed’s policy announcement at 7pm UK time, followed by chair Jerome Powell’s press conference at 7.30pm.
1. US economic projections
The Fed skipped its typical quarterly summary in March as the rapidly-spreading coronavirus had triggered massive uncertainty. That makes today’s figures the first since the pandemic triggered a recession in February.
Today’s projections, which will reflect what FOMC policymakers see as the most likely path for the economy, are expected to indicate a collapse in economic output for 2020 and near-zero interest rates for the next few years.
They will also give some indication of the range of views within the Fed about the expected speed of economic recovery from the coronavirus crisis.
So far the crisis has killed more than 110,000 Americans and triggered an unprecedented slump in commerce.
With over 40m people made redundant, US jobs picked up unexpectedly in May. Data showing the US economy added 2.5m jobs as states reopened in May shocked investors last week, who had expected unemployment to rise close to 20 per cent.
However, while much about the economic impact of the pandemic is still uncertain, it is clear that today’s figures will be significantly worse than the largely optimistic outlook the Fed produced in December.
“The Fed likely forecasts a strong rebound in growth [in the second half of 2020], but the level of GDP will remain well below the pre-coronavirus level until late 2021” said Oxford Economics’ Kathy Bostjancic.
2. Signals of Federal Reserve future policy
In its last statement, released in April, the Federal Reserve said it was “committed to using its full range of tools” to support the US economy.
The Fed has taken drastic measures since the start of the crisis to support the US economy. Those include cutting interest rates near to zero, unlimited quantitative easing, and emergency lending programmes.
Officials have indicated that it is too soon to issue more formal guidance on interest rates or to launch a formal quantitative easing programme. But policymakers are likely to reiterate their dovish stance using similar language.
“Ahead of the introduction of more explicit forward guidance, the Fed might prefer to lean upon its updated ‘dot plot’ and verbal cues to guide markets on rates,” said Investec economist Victoria Clarke.
“It is reasonable to expect that in the near term the publication of a set of forecasts which show little to no expectation of rising rates over the coming years would be enough to reinforce market expectations of low rates for a long time,” she added.
Bostjancic agreed that the FOMC is likely to hold back on offering any specifics in today’s nmeeting. “We anticipate the FOMC will reaffirm its dovish forward guidance but refrain from offering any specific date- or data-contingent forward guidance,” she said.
3. Reality check for markets
US equity markets have staged a remarkable recovery rally in recent months. The S&P 500 has now erased all its coronavirus losses even while the US economy is on shaky ground and deaths spiral.
But the strength of this rally, which has continued amid a wave of bleak US economic data, has led some analysts to worry that the grim projections expected from the Fed later could bring investors back down to earth with a bump.
“The surge has been remarkable given that nearly one fifth of the US workforce is currently out of a job,” said SEB’s Lina Fransson.
“The question is if the central bank’s new economic projections will highlight and remind the currently exuberant equity investors of the tough economic reality,” she added.
4. Walking a tightrope on rates
Powell has already ruled out negative rates, but a rise in interest rates could unsettle traders. Most economists expect Powell to stick to the current record-low interest rates environment, with a fast recovery far from uncertain.
“Today’s FOMC meeting will likely confirm that rates are locked near the zero bound through the forecast period to 2022,” Seema Shah, chief strategist at Principal Global Investors, said.
“Powell will be keen to avoid an own goal and will likely adopt a cautiously pragmatic tone, acknowledging the slight improvement in economic backdrop whilst also reminding markets of the several risks ahead.
“However, it will be another tight balancing act for him. Too upbeat and the low and flat yield curve that has become a key foundation of the recovery scenario may come under sharp selling pressure. Too downbeat and he may throw doubt on the stronger sentiment that has been driving markets higher in recent weeks.”