The Federal Reserve (Fed) completed its latest two-day policy meeting Wednesday, July 29, and the primary message coming from the world’s most important central bank was a continued commitment to supporting the economy as long as it’s needed—and probably even a little longer, we believe, just to provide a margin of error.
The Fed kept the target range for its key policy rate unchanged at 0–0.25% and committed to continued bond purchases. In separate announcements it also extended several of its emergency lending programs through the end of 2020.
“The Fed’s got the economy’s back, and they’ve shown that they have not exhausted their policy tools,” said LPL Financial Chief Investment Officer Burt White. “But they’re a backstop. They can lend, but they cannot lead.”
In his post-meeting press conference, Fed Chair Jerome Powell pointed to the importance of fiscal policy as a complement to monetary policy for supporting the economy, in effect nudging Congress forward as negotiations over the next stimulus bill proceed. While pointing to the Fed’s power to lend, he also signaled the importance of elected officials who “have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources.” While he was calling out Congress, we consider Powell’s deference to elected officials and acknowledgment of their role a virtue. Fed independence is essential for it to do its job effectively, but with independence also comes the risk of overreaching.
Powell indicated that further clarity around the policies the Fed has been reviewing to increase its impact with interest rates near zero will be presented at the September meeting. The most attention has been on sharpening forward guidance whereby the Fed might commit to not raise rates until the economy has reached specific economic benchmarks.
The Fed’s current forward guidance is robust, but not specific. As captured in the short policy statement released following the meeting, the Fed states it will maintain its current target range of 0–0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” While a tame statement in ordinary terms, when we look at it through the lens of “Fed speak,” the nuanced language the Fed uses to express its views to the public, it’s actually a powerful statement. At the same time, further clarity and transparency would be welcome.
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