Speculation is growing that a resurgence of COVID-19 infections and the absence of new fiscal stimulus from Congress could force the hand of Federal Reserve policymakers to act at this week’s meeting instead of waiting until December.
Uncertainty about the presidential and congressional election on Tuesday is also looming over the deliberations of the Federal Open Market Committee, which has pushed back its two-day meeting by a day, to Wednesday-Thursday, because of the vote.
Businesses in Washington, New York and other major cities have been boarding up windows in case of possible violent protests from the election as early voting has already smashed records and overall participation is expected to be extraordinarily high.
Congress has given up on passing any COVID relief until after the election, if then, after Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi failed to find common ground on how much relief to provide and to whom.
Fed chairman Jerome Powell and his cohorts have been urging the government to come up with new spending to help people cope with the ongoing impact of the virus. Even though preliminary figures indicate third-quarter GDP rose a record 33%, economists worry that the recovery will run out of steam as many states re-impose restrictions and government stimulus has mostly ended.
To partially fill the gap, the Fed on Friday lowered the minimum amount for loans in its Main Street Lending Program to $100,000 from $250,000 and relaxed restrictions on debt for the small and medium-sized companies applying for credit.
But businesses have been slow to take up the Fed on the loans, which are backed by Treasury funds, and the uptake at less than $4 billion has been a fraction of the $600 billion available.
Analysts are now speculating that the Fed will have to say something about increasing its asset purchases from the current $120 billion or make other adjustments to signal to the market that it is taking up the slack. Some policymakers are doubtful that increasing the amount of stimulus will have much effect.
Alternatives would be to set outcome goals for the monetary stimulus, rather than just an amount, such as an increase of inflation or GDP. Or the FOMC could announce it was shifting its purchases to longer-dated Treasuries to show that it means them to be genuine quantitative easing rather than just a means to keep trading smooth.
Commerce Department data released Friday showed the personal consumption expenditures price index—the Fed’s preferred measure for inflation—rose 0.2% in September when volatile food and energy prices are excluded, after rising 0.3% in August. The year-on-year rise was 1.5% after 1.4% in August, still far short of the Fed’s 2% target.
Even though the Fed has said it will be more flexible on inflation and tolerate a rate of price increases above that target, it has yet to show how anything it is doing will boost inflation to the level it feels is necessary to support growth.
FOMC members were silent last week, observing the quiet period ahead of a meeting.
Meanwhile, President Donald Trump’s two nominees to the Fed’s Board of Governors continue to languish in the Senate as lawmakers are preoccupied with coronavirus relief and court appointments, keeping the board from getting back to its full complement of seven members.
With at least two or three Republican senators opposed to confirmation of controversial economist Judy Shelton, both she and Christopher Waller, an economist at the St. Louis Fed, must cool their heels a while longer, after waiting more than 15 months since they were nominated in July 2019.