- The minutes from the September 15-16 Federal Open Market Committee (FOMC) meetings showed that participants were still cautious about the state of the economic recovery as they decided to maintain the target range for the federal funds rate at 0 to ¼ percent.
- The risks to the economic outlook are still very present in the eyes of FOMC members. Participants agreed that “the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economy’s medium-term outlook.”
- FOMC members noted the importance that fiscal spending has played in supporting the economy. Specifically, that “prior fiscal policy actions were seen as having supported the ability and willingness of households to spend”. Members also noted that significant risk lied ahead due to “expiration of the enhanced unemployment insurance benefits from the CARES Act”.
- Participants also discussed recent changes to the operational framework, which included greater forward guidance and less focus on ‘policy rule’ driven decisions in the future. All members were in support of the new framework, which included the switch to flexible Average Inflation Targeting. They say this will provide “a strong foundation for monetary policy decisions and communications going forward.” This forward guidance was also on display with the extension of the Statement of Economic Projections, which showed no rate hikes through 2023.
- Participants also commented on the Fed’s balance sheet, which they believe should continue to increase in order to enabled credit to continue to flow through the financial system. Some members think that further clarification should be made on how the “Committee’s asset purchase program could best support the achievement of the Committee’s maximum-employment and price-stability goals.”
Key Implications
- The economy is on the right track but requires continued support. This is the view coming from today’s FOMC minutes. This was echoed by Chair Jay Powell yesterday when he explicitly called for more fiscal stimulus. He spoke of the “tragic” consequences if the government failed to pass new stimulus measures. He added that a lack of additional government support would “lead to a weak recovery, creating unnecessary hardship for households and businesses”.
- The minutes provided more details on the new framework the Fed is using to adjust monetary policy. Though we didn’t get the clarity we were looking for with respect to how the Fed would incorporate average inflation targeting (for example, over what period it hopes to reach target or how much above target it would allow inflation to run), with inflation currently running below 2% and the economy still well below full employment, it is likely to be several years before rates move off the floor.
- Concern has been expressed in some corners over the Fed’s ballooning balance sheet, but there is little doubt that it has been effective in supporting financial conditions. Record low interest rates on Treasuries, mortgages, and corporate bonds have been paramount in the rebound seen in financial markets and interest rate sensitive sectors like housing.
