The FOMC minutes for the April meeting revealed that the members were very much concerned about the job market and inflation outlook as a result of the coronavirus pandemic. While leaving the Fed funds rate unchanged at 0-0.25%, the members also maintained QE. The minutes revealed that “several” members proposed to make asset purchases a traditional program for easing financial conditions. They also discussed about adopting forward guidance in the communication strategy.
The members acknowledged a “sharp” decline in economic activity and a “surge” of job losses in 2Q20. They indicated that there is an “extraordinary amount of uncertainty and considerable risks to economic activity in the medium term”. Meanwhile, “a number” of them “judged that there was a substantial likelihood of additional waves of outbreak in the near or medium term”. While economic disruption in the second quarter was mainly attributed to lockdowns and social distancing measures, there were concerns that consumer spending in certain industries will remain subdued even after these measures are removed.
At the testimony this week, Fed Chair Jerome Powell warned that US unemployment rate could peak at 25%, amidst “very, very bad” economic data. At noted in the minutes, the members were concerned that “temporary layoffs could become permanent, and that workers who lose employment could face a loss of job-specific skills or may become discouraged and exit the labor force”. They were “additionally concerned” about the low income group.
The net effect of the pandemic on price level is disinflationary and it takes time for inflation to return to the 2% target. Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years.
On the monetary policy measures, the members agreed that the policy rate will stay at the current level “until they were confident that the economy had weathered recent events”. They also agreed that QE will need to continue in order to support financial market functioning and the flow of credit to the economy. As suggested in the minutes, “the Committee is prepared to adjust its asset purchase plans as appropriate to support smooth functioning in the markets for these securities”. “Several” participants noted that “a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low”. It appears that they are preparing for a transition of the current asset purchase program to a traditional program of scheduled purchases to ease financial conditions.
Once again, the members called for more from the government, noting that fiscal support was crucial during this period, and that “even greater fiscal support may be necessary if the economic downturn persists”.
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