US Fed opens policy meeting amid faltering confidence

July 28, 2020: The US central bank opened a two-day policy meeting on Tuesday amid signs of waning consumer confidence and with Congress locked in debate over how best to support the economy amid the pandemic.

With interest rates already at zero and the Federal Reserve pumping trillions into the economy through myriad loan programs, policymakers are expected to focus less on direct action as COVID-19 remains a bigger concern.

Coronavirus cases and death tolls are resurging, and many states have reimposed more strict controls, again shutting down some businesses, while tens of millions of jobs have been lost, many permanently.

Jobless workers are also now facing the imminent expiration of extra unemployment benefits unless Congress acts.

Analysts expect the Fed to reinforce a tool used during the global financial crisis: forward guidance.

The policy-setting Federal Open Market Committee (FOMC) is expected make plain that it has no intention to raise the benchmark interest rate until the US is fully back on track and unemployment has fallen significantly from the current 11.1 percent level, while focusing less on inflation.

Amid signs the economy continues to struggle, how much of a boost that declaration will provide is unclear, but economists view it as a minimum step.

"The events of recent weeks have changed my view on forward guidance," Grant Thornton chief economist Diane Swonk said in an analysis.

"Now is the time to clarify the Fed's position on forward guidance, which means being explicit about holding interest rates near zero until the economy actually overshoots on its two percent inflation target."

- More lending -

The FOMC will announce its policy decision Wednesday afternoon, and Fed Chair Jerome Powell will hold a press conference to explain the statement.

Powell has said the central bank can do more to help the economy weather the pandemic storm, and on Tuesday the board announced it was extending lending facilities through the end of the year that had been set to expire around September 30.

The Fed said those programs for firms of all sizes as well as states and municipalities "provide a critical backstop stabilizing and substantially improving market functioning and enhancing the flow of credit to households, businesses and state and local governments."

But as the pandemic fire continues to rage, a key measure of consumer confidence dropped sharply in July, highlighting the continued uncertainty about the economy. The Conference Board research firm said its consumer confidence index fell to 92.6 from 98.3 in June, worse than analysts expected.

The government on Thursday will release the first official data on the damage done to US GDP in the April-June quarter, which is expected to show a shocking collapse of around 35 percent. But the Fed does not need that figure to realize the harm already inflicted on American households and firms.

Powell and other central bankers have made it plain that the Fed's options are limited and the federal government will need to provide more cash.

As expanded unemployment payments and a moratorium on evictions are set to expire, Senate Republicans late Tuesday unveiled a $1 trillion support package that slashes additional weekly jobless benefits to $200 a week from $600, but also would offer a second round of $1,200 payments to individuals and give funding to schools, provided they reopen.

That sets the stage for a showdown with Democrats who are pushing their own $3 trillion plan.

AFP/APP