EconoFACTS

August 19, 2020 | 14:47

Minutes of July 28-29 FOMC Meeting

Economist

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

The Fed didn't announce new policies at the July meeting but said it was ready to do more should the economy need further support. The minutes of the meeting add weight to this message. Policymakers believe the uncertainty about the outlook is "very elevated'. Though consumer spending was initially picking up strongly, it has slowed due to the resurgence of infections. Many businesses continue to struggle, and employment growth has weakened. Economic slack is expected to more than offset supply issues to depress inflation. As a result, "a highly accommodative stance of monetary policy would likely be needed for some time to support aggregate demand and achieve 2 percent inflation over the longer run." The Fed will continue its asset purchase program at the current pace (buying $80 billion of Treasuries each month and $40 billion of mortgage bonds). But it might not stop there. Due to the uncertainty, "...several participants suggested that additional accommodation could be required to promote economic recovery...". Most members did not see rate hikes at least through 2022, based on the June projections. The dour economic outlook suggests this view won't change much when the next projections are released in September.

The minutes affirmed that the Fed will make changes "in the near future" to its "monetary policy strategy, tools, and communication practices" based on its yearlong strategy review. The September policy meeting might be a suitable venue to announce the change. The minutes did not indicate which changes are preferred, though it is widely expected that the Fed will adopt some form of average inflation targeting, which would imply a longer period of low interest rates to compensate for past shortfalls in hitting the target. The members discussed forward guidance via both outcome-based and calendar-based targets for economic and inflation goals. In July, "a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point." The Fed is less keen on yield curve control, though, as "many participants judged that yield caps and targets were not warranted in the current environment but should remain an option".