Fed Meeting to Focus on Laying Out Interest-Rate Strategy

Fed Meeting to Focus on Laying Out Interest-Rate Strategy

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Fed Chairman Jerome Powell is set to give a press conference at 2:30 p.m. Eastern time Wednesday.



Photo:

Andrew Harrer/Bloomberg News

Federal Reserve officials resume deliberations Wednesday about how to detail plans to support the economy now that they have formally adopted a strategy to keep interest rates lower for longer.

Officials’ public remarks before entering their traditional pre-meeting quiet period two weeks ago suggested they hadn’t yet decided how to reconfigure their policy statement to reflect the new framework. This raises the prospect they could make a few changes now and more extensive ones later this year.

The central bank releases its policy statement at 2 p.m. Eastern time along with new economic projections. Fed Chairman Jerome Powell follows with a press conference at 2:30 p.m., at which he could explain how he and his colleagues are thinking about possible additional steps.

Here’s what to watch:

Forward Guidance

For the last six months, the Fed’s policy statement has said officials would keep rates near zero until they are “confident that the economy has weathered recent events and is on track to achieve” the central bank’s inflation and employment goals. Several officials have said this language, introduced when the Fed cut rates to near zero on March 15, will eventually need to be updated.

While the statement Wednesday could include tweaks to reflect the adoption of a new framework that seeks for periods of higher inflation following episodes of inflation below the Fed’s 2% target, it isn’t clear if officials will agree this week on how or when to make their guidance more specific.

Several officials have said they are in no rush because they want to have more clarity about the economic outlook and because investors already expect the Fed to keep rates low for several years.

But other officials have said this guidance should build on the new framework by spelling out specific inflation and labor-market conditions consistent with keeping rates near zero. These steps could help convince markets that the Fed won’t raise rates aggressively even after the virus has been controlled and the economy is on sturdier footing.

Rate Dates

Nearly all Fed officials in their June projections saw rates staying near zero through 2022. Their new projections will run through one additional year and are likely to show rates holding near zero at least through 2023.

This would offer a mild form of guidance to reinforce the “lower for longer” rate refrain that emerged from the framework review. It might have little immediate effect because investors in futures markets don’t expect the Fed to lift its benchmark rate until 2024.

Economic Outlook

Officials could acknowledge stronger growth has materialized than anticipated in June. The unemployment rate fell to 8.4% in August, below officials’ June projections that it would average between 9% and 10% in the last three months of the year.

But this might do little to change their midrange outlook. Officials could project a less severe downturn this year and a somewhat less buoyant rebound in 2021. Officials have indicated concern that easy gains from reopening the economy could mask deeper scars, as the most vulnerable businesses shut down and employees in hard-hit sectors face longer spells of joblessness.

Economic projections that run through 2023 offer little insight on their own given high uncertainty. But in combination with the rate projections, they could shed a little more light on why officials think low rates will be necessary—including because inflation remains at or below 2%.

Bond Buying

Officials could also clarify that their purchases of Treasury and mortgage-backed securities, initiated in March with the stated goal of repairing market functioning, are being maintained now to support a faster economic recovery. Since mid-June, the Fed has been purchasing $80 billion a month in Treasurys and $40 billion a month in mortgages, net of redemptions, down from even larger quantities in the spring.

Reframing the reasons for these purchases would have little effect on its own, but it might raise questions about when or how the Fed might adjust the bond purchases.

These questions include whether to link guidance about rate plans to the pace of asset purchases and whether to shift purchases of Treasurys to longer-dated securities, as the Fed did during its bond-buying program from 2012 to 2014. Currently, the Fed is purchasing a wider range of short-, intermediate- and long-term securities.

“We have so much [Treasury] supply coming down the pike that the market wants something a little bit more specific,” said Priya Misra, head of interest-rate strategy at TD Securities.

Framework Follow-Up

The Fed’s new long-run strategy says that following periods when inflation has run persistently below the central bank’s 2% target, officials will want inflation to run moderately above 2% for some time. Mr. Powell is likely to face questions at the news conference over how to define vague terms like “moderately” and “some time” that address how far and for how long officials would allow inflation to rise above 2%.

So far, most officials have shied away from providing such specifics, emphasizing they aren’t following a mechanical rule to anchor inflation expectations and instead want to maintain flexibility. As a result, it would be a bit surprising if Mr. Powell delivered more precision Wednesday.

Federal Reserve Chairman Jerome Powell on Thursday announced a major shift in how the central bank sets interest rates. WSJ’s Greg Ip explains the strategy behind the changes and what they mean for consumers. Photo: Erin Scott/Bloomberg

Write to Nick Timiraos at nick.timiraos@wsj.com

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