Fed's meeting statement likely to reflect inflation averaging shift

With the federal funds rate as low as the Fed is willing to take them and the U.S. economy still a ways off from its pre-pandemic level, the central bank is expected to keep monetary policy unchanged at the Federal Open Market Committee meeting, which wraps up on Wednesday.

In fact, the CME MarketWatch tool puts the probability of the interest fed funds rate staying at 0%-0.25% at 100% for this meeting and each meeting through March 2021.

More of note will be how the Fed’s recent shift to inflation averaging will affect the language in the FOMC’s statement released at the end of the meeting, especially regarding its forward guidance.

Here’s the FOMC’s guidance from its July 29 statement: “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Also from the latest statement: “In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective.”

Fed Chair Jerome Powell is also sure to get many questions relating to the change at the post-meeting press conference.

Keep an eye out, too, for whether the Fed tweaks its asset purchase programs, and if it considers market functions to be essentially repaired since the March disruption caused by the COVID-19 pandemic.

The Fed’s monetary policy-setting arm has made statements after previous meetings that more monetary and fiscal policy actions would be needed to support the economy. So Powell may get questions on what else needs to be done and what’s left in the Fed’s toolkit.

The FOMC members also release their economic and interest rate projections. So it will be interesting to see how they factor in the effect of the coronavirus and lifting of some lockdown measures into their projections.

When Fed official last released their projections in June, almost all expected rates to stay near zero through 2022. If they extend the near-zero rates through 2023, it would support the Fed’s “lower for longer” rate refrain came out of the Fed’s framework review.

Also coming up next week: The Bank of Japan is expected to keep policy unchanged on its meeting and the Bank of England is also expected to leave policy unchanged, although some economists expect to the BOE to indicate more bond purchases at the end of the year. Both meetings take place on Thursday.


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