Fed Extends Emergency Programs on Eve of July Policy Announcement
Fed Extends Emergency Programs on Eve of July Policy Announcement
WASHINGTON — The Federal Reserve extended its emergency lending programs on Tuesday through the end of 2020, a three-month addition that, while not surprising, signaled how lasting the economic damage from the coronavirus is proving.
The decision came as officials gathered remotely for a two-day policy meeting that will conclude on Wednesday, when the Fed releases a statement at 2 p.m.
That meeting is likely to yield little action — rates are already at near-zero and are almost certain to stay there for an extended period — but it could provide a fresh read on how Fed officials are thinking about the economic outlook, and hints about their plans for the future.
The chair, Jerome H. Powell, who will hold a remote news conference at 2:30 p.m., is sure to field questions on the newly extended emergency lending programs, which have been introduced to try to keep markets functioning and credit flowing.
The Fed took unprecedented actions in March and April to provide a first line of defense for the economy as coronavirus cases swept the nation and shut down entire business sectors. Most of the nine programs were set to expire on or around the end of September, evidence that officials expected that normal conditions might return by fall.
That optimism has been upended by a surge in new infections, which has continued to depress economic activity. While state and local economies have reopened, many have had to roll back or delay their plans, and experts warn that the situation could take a turn for the worse if the virus takes hold more deeply.
Unemployment remains in double digits and more than a million new people have continued to file for state jobless insurance each week. The path forward for government relief remains uncertain as Congress haggles over how to extend federal aid for the pandemic’s many economic victims, including an extra $600 per week in unemployment benefits that expires on July 31.
That is why the Fed’s emergency lending programs could continue to prove useful. The mere announcement of the programs helped smooth markets and many have been lightly used, but officials have warned that conditions could worsen again if a second wave of the virus strikes. Renewed turmoil could create a need for the backstops, which buy corporate bonds, support the market for asset-backed securities, and facilitate lending to smaller and midsize businesses.
“They’re facing the fact that the Covid numbers have gone in the wrong way for several weeks,” said William English, a former top staff official at the Fed board who is now at Yale. “It is pretty clear these programs are going to be helpful for several more months.”
Seven of the nine programs were set to expire on or around the end of September, but they have now been extended through the end of the year. Two others — one that buys municipal debt and another that smooths over the market for short-term business funding — already had later end dates.
Providing credit has been one facet of the Fed’s policy response as the coronavirus has closed businesses, cost jobs, and kept millions of Americans in their homes and away from malls, planes and movie theaters. The central bank also cut interest rates to near-zero in March, a bid to shore up lending and spending and cushion the blow to economic activity. It has been buying vast amounts of government-backed debt in an effort to keep bond markets functioning normally.
Officials are now debating what comes next, and economists are expecting some discussion of the possibilities after Wednesday’s meeting.
While officials have made it clear that interest rates will be low for a long time, central bankers must decide how to signal just how patient they plan to be. They could commit to low rates by promising not to raise them until after a given date, or by tying near-zero rates to a certain inflation or unemployment threshold.
Some economists, like Kathy Bostjancic at Oxford Economics, said it was possible that the Fed would commit to an inflation or employment goal at this meeting, but most Wall Street analysts expect policymakers to wait.
“We do not think Fed officials have settled on the strategy,” economists at Bank of America said in a note previewing the July meeting.
The Bank of America analysts did believe that Mr. Powell could lay out the options going forward. They also expected the policy-setting Federal Open Market Committee, or F.O.M.C., to tinker with the description of the economy in its post-meeting statement.
Even those tweaks could be relatively minor, Michael Feroli at J.P. Morgan wrote in a meeting preview.
“Fed staff and F.O.M.C. officials have been consistently concerned about the risk of resurgence of the virus — a resurgence that is now taking place,” he said.
A quiet July Fed meeting would set the stage for a more active autumn. The Fed has been reviewing its approach to monetary policy for more than a year, and that process is expected to conclude soon. Goldman Sachs economists expect it to finish in September. They wrote in a research note that the Fed would wait to make clear statements about the future path of policy after that.
“We think that the most logical order is to first complete the framework review and then introduce policy changes,” they wrote in a note on Friday. “If anything, the resurgence of the virus and the rising uncertainty about the outlook have likely increased their desire to wait for more information.”
The Fed is expected to set out its future bond-buying plans at some point, though probably not this month. It is currently buying both Treasury bonds and government-backed securities to soothe markets, and said in June that its purchases would continue at their pace or more over the “coming months.” Officials could still transition the program into one more explicitly meant to stimulate the economy.
Economists also believe that officials could eventually try yield curve control — an approach in which the Fed tries to cap or target the interest rates on bonds at specific maturities. Fed officials themselves threw some cold water on that idea in their June meeting minutes, which signaled little appetite to adopt such an approach in the near future.
For now, the central bank is expected to use its meeting to signal continued vigilance without making such big commitments.
“I think they’ll play up the idea that there’s a lot of uncertainty,” Mr. English said. “And that they will do whatever it takes to make sure the economy gets back on track.”