Several Federal Reserve policymakers say the U.S. central bank may need to ease monetary policy further to help nurse the economy through the coronavirus pandemic, minutes from their policy meeting last month showed on Wednesday.
The Fed has already slashed interest rates to zero and bought trillions of dollars of bonds in response to the economic crisis spurred by virus, moves which have provided a boost to jobs and spending.
But, according to the readout of the July 28-29 policy meeting, members of the rate-setting Federal Open Market Committee saw the rebound in employment already slowing and additional "substantial improvement" hinging on a "broad and sustained" reopening of business activity.
Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term.”
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Since last month, the number of new daily coronavirus infections has dropped, but is still averaging around 50,000, slowing business reopenings and, in some parts of the country, forcing schools to delay, reverse, or abandon plans to conduct in-person classes.
"Noting the increase in uncertainty about the economic outlook over the intermeeting period, several participants suggested that additional accommodation could be required to promote economic recovery and return inflation to the Committee’s 2% objective," the minutes from the meeting said.
Policymakers last month discussed a range of possible approaches that could be appropriate "at some point," including promising to keep interest rates low until certain economic benchmarks are met, or until a particular future date. The Fed used both options effectively during the last recession.
In what would be a novel approach for the Fed, policymakers also expressed little support for adopting caps or targets for Treasury yields. "Many participants judged that yield caps and targets were not warranted in the current environment but should remain an option" for the future, the minutes said.
The apparent swearing-off of pursuing a form of Treasury yield curve control did not go down well in the Treasury market. Yields on 30-year bonds and 10-year notes both rose notably.
"It seems the market is quite displeased with the discussion about yield curve control specifically," said Tom Simons, a money market economist at Jefferies in New York.
MONETARY GAS PEDAL
The minutes also showed policymakers were nearing agreement on changes to the Fed's policy framework, including its periodic "Statement of Longer-run Goals and Monetary Policy Strategy," that could result in the U.S. central bank sticking with aggressive stimulus measures far longer than under its previous rubric.
Fed officials "agreed that ... refining the statement could be helpful in increasing the transparency and accountability of monetary policy," the minutes reported.
"Participants noted that the Statement on Longer-Run Goals and Monetary Policy Strategy serves as the foundation for the Committee's policy actions and that it would be important to finalize all changes to the statement in the near future."
Policymakers decided to revamp their policy approach in late 2018, when they worried that low inflation and low interest rates globally would mean they would need stronger tools than before to combat future recessions.
That was well before the pandemic ended a record-long period of growth and sent the world's biggest economy into its sharpest downturn since the 1930s.
At the current juncture, with the U.S. unemployment rate at 10.2%, drastic cuts this month in government aid to households and businesses, and the virus continuing to spread, changing the Fed's overarching framework may have little short-term impact on policy.
But it could signal the Fed's readiness to keep its foot on the monetary gas pedal, and perhaps to take even more aggressive action ahead.
At the July policy meeting, all 17 policymakers supported leaving the target range for short-term rates between 0% and 0.25%, the minutes showed.
They also said the outlook for the economy hinged on the outlook for the virus, which has now killed more than 171,000 people in the United States, according to a Reuters tally.
And a number of participants said that since many provisions of the government's massive late-March coronavirus rescue package are due to expire while the labor market is still weak, "additional fiscal aid would likely be important for supporting vulnerable families, and thus the economy more broadly, in the period ahead."
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