When the Federal Reserve meets this week, investors and policymakers alike will pay close attention to how Fed Chair Jerome H. Powell characterizes the state of the economy — and the extent to which he flags the worsening pandemic and chaos over the next round of stimulus as risks to the recovery.
Nobody expects that the Federal Reserve will exercise its main policy tool and change interest rates, which are expected to remain at zero. However, this typical Fed meeting comes as a surge of coronavirus cases has forced states to dial back their reopening plans. Congress is divided over a $1 trillion stimulus proposal, and lawmakers are scrambling to reach a deal on extending enhanced unemployment benefits before those run out this week.
Meanwhile, a growing number of economic indicators suggest that the short-lived recovery from earlier this summer is eroding.
That puts particular focus on how explicit Powell will be about the fate of the economy. When the Fed concludes two days of policy meetings Wednesday, he will appear at a virtual news conference at 2:30 p.m.
As lawmakers clash over the country’s public health response and another stimulus bill, the Fed is under pressure to stay out of the political fray and signal that it will do whatever it takes to blunt the recession’s devastation. Powell is seen as a steady leader at a time of tremendous economic upheaval. And although he is known to choose his words exceedingly carefully, come Wednesday, he will be the one to deliver the Fed’s message.
“The stakes will be high in terms of Powell’s press conference,” said Ernie Tedeschi, head of fiscal analysis at Evercore ISI, an investment banking advisory firm. “He’s going to be characterizing the way the Fed is thinking about the economy, with all of this added uncertainty in the next couple of weeks. … I would really like to hear the Fed’s perspective on how they’re processing it.”
For months, Powell has emphasized that the virus will dictate the path of the recovery and that an economic turnaround won’t be sustained until people feel comfortable resuming their normal lives. Those warnings came before a new surge of coronavirus infections over the past few weeks forced several cities and states to scale back reopening plans and, in some cases, close down bars and restaurants again.
But Fed officials have consistently voiced concern that the country could enter a much worse recession later this year if cases continue to climb. That stands in stark contrast to promises from White House officials that the economy is forging ahead. This week, White House economic adviser Larry Kudlow, director of the National Economic Council, said the V-shaped recovery is still intact.
Yet the economy faces a growing list of newly troubling signs. Unemployment claims rose for the week ending July 18 — marking the first increase in weekly claims in months. An analysis of data from the payroll processor ADP found that the temporary Paycheck Protection Program accounted for as much as half of the private-sector job gains from April to June, raising the risk that people will get kicked out of the workforce as the program runs out. A Yelp report showed that permanent business closures now outnumber temporary ones.
At Wednesday’s news conference, Powell will also have to account for what the Fed does not fully know about the economy. Data on second-quarter U.S. gross domestic product won’t be released until Thursday, but a major fall is expected.
The July jobs report won’t be released until Aug. 7, but economists aren’t optimistic. Tedeschi analyzed weekly data from the Census Bureau that suggests the job gains from June have since been wiped clean.
“Of course, they can’t always wait until they have the data to act,” said Stephanie Aaronson, director of the economic studies program at the Brookings Institution, who spent nearly two decades at the Federal Reserve Board.
“The situation is very fluid, and that certainly complicates the job of policymakers,” Aaronson added.
When the pandemic triggered a huge economic shutdown in March, the Fed was quick to roll out a slew of emergency programs to bolster the markets and provide new lending programs to midsize businesses and municipalities. Fed leaders have said their moves to support the stock market should remain in place as a safeguard. Although the lending programs have been dogged by bumpy rollouts and little uptake, Fed officials say the programs can be tweaked to encourage as much participation as possible.
“Powell and others have been pretty clear that they are concerned the recovery is losing steam,” said Tim Duy, an economics professor at the University of Oregon and the author of the Fed Watch blog. “You’re going to have a fairly somber outlook. It does create a bit of a challenge because the longer that unemployment is high, and the longer inflation is low, that will put increasing pressure on them to do something else. But they’re not in a position yet to do that ‘something else.’”
From a policy standpoint, interest rates are already at zero, and the Fed has signaled that will be the case through at least 2022. Minutes from the Fed’s June meeting show that officials discussed other policy paths, like forward guidance and large-scale asset purchases, without coming to any firm conclusions.
Still, Powell and others at the Fed have said that they cannot repair the economy alone and that more will be needed from Congress to support millions of Americans and their businesses. Testifying before the House Financial Services Committee last month, Powell said that “it would be appropriate to think about continuing support for people who are newly out of work and for smaller businesses who are struggling.”
“The economy is just now beginning to recover,” Powell said. “It’s a critical phase, and I think that support would be well-placed at this time.”
In the background, analysts are awaiting the release of the Fed’s long-term monetary policy review. This week, they are looking for any hints from Powell’s news conference about a new policy framework, which could change the way the Fed approaches its inflation target.
Regardless, policymakers, economists and analysts will turn to Powell for a clear outline of how severely the pandemic has gripped the economy — and how much tighter it could take hold.
“The Federal Reserve is in transition between a policy strategy that’s obviously undergone tremendous stress, to one in which they’re going to shape the post-pandemic economy,” said Joe Brusuelas, chief economist at RSM. “The context around that is with Congress and the administration at loggerheads on aid, the Fed remains the only one in town.”