- The Federal Open Market Committee’s (FOMC) minutes from the meeting that took place over July 28-29 showed that participants continued to be very concerned about the health and economic impact of COVID-19. As such, they decided to maintain the target range for the federal funds rate at 0 to ¼ percent. Participants expected to maintain this range until they were confident that the economy was well on its way to achieving the maximum employment and price stability objectives.
- FOMC members were particularly keen to note the important role fiscal policy has to play during this crisis. Fiscal support, particularly from the CARES Act has been “very important in granting financial relief to millions of families” and it has supported consumer expenditures. Members observed that with some provisions in the CARES Act expiring, additional fiscal aid will likely be important for supporting vulnerable families and the economy as a whole in the period ahead.
- Participants also recognized the operational difficulties faced by businesses. Supply chain disruptions, reopening and closing challenges as well as employee absenteeism has had a significant impact on business investment. Here too, members saw fiscal policy playing a particularly important role in supporting business activity.
- In terms of financial market functioning, FOMC members continued to see improvement since the turbulence in March. Federal Reserve actions including emergency lending facilities have helped credit flow to households and businesses.
- Participants also saw a number of risks surrounding the economic outlook. A resurgence of the virus and a lack of fiscal support were chief among them. Members noted that there could be long-run impacts on the economy that could “slow the growth of the economy’s productive capacity for some time.”
- FOMC members also discussed the future of monetary policy at this meeting. They deliberated revising policy communications so that it included more specific forward guidance. This included a debate on outcome-based forward guidance versus calendar-based forward guidance. Many participants thought a revised Statement on Longer-Run Goals and Monetary Policy Strategy would he helpful in providing a framework for future FOMC actions.
- Yield curve control was another topic that come up during discussions. But many participants judged “that yield caps and targets were not warranted in the current environment” due to the costs of implementing such policy (i.e. rapid expansion of balance sheet and difficulties in the design and communications).
Key Implications
- The FOMC minutes from July once again showed that members were very concerned about the near and long-term impacts of COVID-19. They agreed that the economic outlook was dependent on the path of the virus, which itself is highly uncertain.
- What members were clear on, however, was fiscal policy. Throughout the meeting minutes, participants zeroed in on the importance of fiscal policy in supporting spending, investment, the labor market, and reducing uncertainty. They also discussed the risk of insufficient fiscal policy, which could be a reality due to the impasse in Congress at the moment.
- In terms of additional monetary support, several FOMC members thought more will be required to promote the economic recovery. Given the lengthy discussion on forward guidance and communication, we could see these changes implemented in September.
