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Fed rate decision preview: New tools to fight virus spikes?

The Fed chairman Jerome Powell affect gold price

The Federal Reserve has the unenviable task of trying to work out how much the recent spike in coronavirus cases has set back the US economic recovery.

Investors will closely monitor comments of the central bank’s Federal Open Market Committee (FOMC) at the end of their two-day meeting on Thursday to gauge what action it will take to shore up a recovery that appears to be weakening.

Federal Reserve chairman Jerome Powell (pictured) has said he is in no rush to raise interest rates from their record-low of 0.25%.

ING chief international economist James Knightley said that June minutes “showed just two FOMC members expecting the Fed to announce any increase in the policy rate before the end of 2022, there is little need to be any more explicit with their policy guidance at this stage”.

Stock markets race ahead

Since the health crisis gripped the country in March, the Fed has boosted its holdings of bonds, loans and other assets to $7trn in June, up from $4.2trn in February, reflecting the wide range of financial packages it has launched.

That support is still being fed into the US economy. Specifically, on quantitative easing, it has been tapered to around $4bn a day of Treasury purchases versus $75bn a day at the peak.

Stocks on Wall Street climbed more than 45% since their 23 March low with the market at the time pricing in a strong third quarter and a V-shaped recovery.

Data has shown that mortgage applications for home purchases and car sales have rebounded while retail sales have recovered to within half a percentage point of their value in February.

Businesses were returning to work and output is on the rise broadly across the economy.

In June, a cautious Powell told the House Financial Services Committee: “While this bounceback in economic activity is welcome, it also presents new challenges — notably, the need to keep the virus in check.”

He added: “A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”

The Fed sees new spikes slow economy

However, in the last month or so, new spikes in such large states Texas, Florida and California have forced governors to backtrack on re-opening plans, leading to businesses closing again with workers losing their jobs.

Stocks have spluttered. The largest weekly rise for the S&P500 index is 1.8 per cent over the past month.

Investors will want to know whether the Fed will opt to use any more tools at its disposal.

Powell has ruled out negative interest rates for now, but other unconventional measures are on the table.

One option is explicit forward guidance, amounting to a strong message from the Fed about its intentions would keep a lid on longer-term interest rates for the foreseeable future, creating easy borrowing conditions in financial markets and, in turn, stronger economic growth.

Another is Yield curve control, where the central bank uses quantitative easing to target specific yields to prevent borrowing costs rising too far too quickly. In this move, the Fed sets targets for Treasury yields and then buys and sells as many securities as necessary to maintain those levels.

The market will pay close attention to Powell on Thursday to devine his plans to help the US economy on what looks set to be a difficult third quarter.

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All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
Roger Baird

Roger Baird is News Editor at Finixio. He has worked as a financial journalist for 20 years reporting on companies, capital markets and the UK economy.