The minutes of the mid-September Federal Open Market Committee meeting Wednesday showed Fed Board members and regional bank presidents worried about more intense virus outbreaks and the chance of no near-term government stimulus – weeks before both concerns seemed to be realised.
The minutes added almost nothing in the way of fresh insights not already provided by Federal Reserve Chair Jay Powell’s mid-September post-meeting news conference and his subsequent remarks, including his speech to NABE members Tuesday. Nevertheless, the glass half-empty side of the minutes had participants concerned about the very circumstances that about three weeks later seem to be happening – more virus and no new round of pandemic relief.
“Most participants raised the concern that fiscal support so far for households, businesses, and state and local governments might not provide sufficient relief to these sectors,” the minutes said at one point.
The minutes stated, “While the risk of another broad economic shutdown was seen as having receded, participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery. Such scenarios,” they continued, “could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses.”
At another point, the minutes said, “Participants continued to see the uncertainty surrounding the economic outlook as very elevated, with the path of the economy highly dependent on the course of the virus.”
The minutes also detailed the discussion around the Fed’s forward guidance that Powell Tuesday told his audience of economists was well phrased, since it was “outcome based”, not time-based or some kind of immutable promise.
In the words of the document, “Participants generally noted that outcome-based forward guidance for the federal funds rate of this type was not an unconditional commitment to a particular path.”
If outcomes determine Fed policy, bad outcomes could trigger more Fed support, including an expanded quantitative easing, one source of hope for investors who correlate asset buys with better returns.
Virus cases are reported to be rising in almost two dozen states, just the kind of intensification experts like the NIH’s Tony Fauci keeps warning is the worst kind of preamble to a fall that forces people indoors and when an influenza season could greatly complicate the health-care picture.
As far as stimulus goes, the president called a halt to talks in unexpected tweets Wednesday and then suggested the small-bore “targeted” injections of cash into the airline industry and for checks to individuals were still possible despite being rejected repeatedly by House Speaker Nancy Pelosi.
Talks did not stop, incidentally, with her and Treasury’s Stephen Mnuchin communicating again by telephone Wednesday morning. Missing, though, was any new indication from Pelosi she was altering her stance about the need for comprehensive pandemic relief that would be armed with $2.2 trillion. The last offer from Mnuchin was $1.6 trillion.
The day’s strong rally in US stocks, retracing the losses triggered by Trump’s no-go tweets the day before, appeared to be based either on a hope Trump’s willingness to sign smaller measures would somehow prevail or that he was becoming less relevant to the entire endeavour.
The push for the stimulus may be transcending the whims of a president whose ultimate goals for Congress have been vague and lately somewhat contradictory. Backing stimulus have been the Fed, the Business Roundtable big-business contingent and on Wednesday, even some moderate Republicans on Capitol Hill. The considerable evidence the economy is not sustaining the third-quarter snapback and the increasingly obvious pain on Main Street also lean on the side of some additional help from government.
Regarding Main Street, the Fed’s report on the use of consumer credit, released an hour after the minutes, was old data from August. Yet it showed an unexpected decline of $7.2 billion at an annual rate overall. Revolving credit contracted $9.4 billion.
Despite all that, nothing pertinent seems to be happening, the House and Senate are absent, a president who may or may not still be contagious is isolated in the White House residence, the virus is sweeping through his staff and a weaker fourth quarter is underway. No one knows which party will control the Senate, the House and the White House in less than a month.
Uncertainty rules except perhaps on Wall Street where optimistic traders and investors were imagining better times ahead – somehow. Shortly after the Fed released its account of the FOMC meeting, the Dow industrials was up around 2%.
The minutes showed that uncertainty was also on the mind of the business community, whose comments the Fed gathers at six-week intervals.
“Business contacts pointed to several factors that could restrain further recovery, including high levels of uncertainty that were reportedly still holding back hiring and capital spending,” the minutes said. “Some contacts reported difficulties in managing disruptions in supply chains, as well as elevated levels of employee absenteeism because of the pandemic. Additionally, District contacts indicated that fiscal policy had helped support small businesses.”
The minutes reiterated the solid agreement among top Fed policymakers about the overriding reality that the virus is not something to be downplayed by anyone who is looking to a better economic future beyond the bounce that’s already occurred.
“Participants agreed that the path of the economy would depend on the course of the virus and 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,” the minutes said.