What’s Next for the Fed?
What’s Next for the Fed?
The Federal Reserve meets on December 15th and 16th. With COVID-19 cases spiking and the economic recovery faltering, the Fed might be expected to spring into action with monetary support. However, the Fed and the economy are in very different places than they were when the coronavirus pummeled the global economy in March, and it appears unlikely at this time that the Fed will undertake large-scale action.
First, the Fed has already used up most of its ammunition this year to stabilize markets and position the economy for a speedy recovery post-COVID. Short term interest rates were lowered to zero, and Fed asset purchases helped bring down long term rates; the Fed’s expressed willingness to buy corporate bonds, though not implemented widely, helped reassure jittery markets in March and bring down credit spreads. The Fed still could increase asset purchases or, more likely, shift its asset purchase mix to include more longer-term bonds, thereby depressing long-term interest rates further and encouraging more consumer borrowing and investment into riskier assets. Such maneuvers, if they even occur, are certainly much smaller in scale than Fed actions earlier this year.
Second, the economy has already revived considerably from the COVID-19 induced recession. US and global markets have broadly recovered their losses, and US unemployment has fallen from 14.7% in April to 6.7% in November. US GDP also rose sharply in Q3 2020, though it remains about 3% below its level at the end of 2019. Still, with high unemployment, a recovery that’s slowing with the fall surge in COVID-19 cases, and vast economic pain for those firms and workers in sectors devastated by the virus, we would hope for additional economic stimulus, and soon.
But such stimulus would best be fiscal stimulus, and not monetary stimulus. Monetary stimulus takes time to work its way through the economy, and with a vaccine already beginning to be distributed, we just need an economic bridge for the next few months. As Fed chair Jerome Powell has argued, it would be preferable if Congress and the President can quickly get financial support to the states, localities, firms, and employees that desperately need it. Whether an often gridlocked Congress can come to an agreement is unknown at this time, but at this point, monetary policy has done what it can, and the Fed meeting is more likely to result in talk, tweaks, and guidance than major action.
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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.