Seven weeks ago, America’s monetary-policy makers were optimistic about the economy’s potential to make a complete and rapid recovery. They probably aren’t as sanguine now.
The Federal Reserve’s Open Market Committee is meeting for the first time since the resurgence of the coronavirus across large swaths of the U.S. that began in mid-June. Since then, the number of new confirmed cases of the virus has tripled and the number of Americans hospitalized with Covid-19 has doubled, with the economy losing its upward momentum as a result. The impact of the viral outbreak is being compounded by policy choices that promise to suck tens of billions of dollars out of the economy each week.
With this backdrop, here are three things to watch:
👉 New guidance about when to raise rates 
No one expects rate increases soon, but even the prospect of future rate increases can affect financial conditions today by driving up longer-term bond yields. So far, that hasn’t been much of an issue, with the yield on the typical 30-year mortgage still at all-time lows, for example.
But to prevent future problems that could derail the recovery, the Fed may choose to be more explicit about the conditions under which it would start “lifting” short-term interest rates. The Fed might want to wait until specific job market indicators had passed certain thresholds, for example. David Mericle at Goldman Sachs thinks the Fed is “almost certain to adopt outcome-based forward guidance,” although maybe not at this week’s meeting.
👉 Hints about new policy tools
Guidance may not be sufficient by itself to keep longer-term rates where Fed officials want them. That could mean that the Fed will eventually follow the path of the Bank of Japan and the Reserve Bank of Australia, which explicitly target or “cap” yields on longer-dated debts.
The Fed itself did this in the 1940s.
There isn’t yet any indication this will be necessary, but as Mericle put it, “it would seem awkward to undertake a two-year review largely premised on the concern that the main traditional tool — cutting the funds rate — is no longer as effective, only to conclude that there are no attractive new options.”
👉 Thoughts on how recent events affect the economic outlook
The biggest change since the last Fed meeting is the renewed spread of the virus. Indicators ranging from the Federal Reserve Bank of New York’s Weekly Economic Index to the number of people passing through Transportation Security Administration checkpoints at airports to the number of seated diners at restaurants tracked by Open Table have either flat-lined or gone negative in the past few weeks.
So far during the coronavirus crisis, the Fed has been perfectly willing to act when necessary without regards for the formal schedule. That suggests the events of the past seven weeks haven’t been bad enough to require an immediate response, although the Fed did say on Tuesday that it would make many of its emergency lending facilities available for longer than planned. Still, it will be worth paying attention to Chairman Jerome Powell’s commentary on the state of the economy for clues about what could prompt further action.
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