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Fed Minutes Show Worry About Economy, Need For More Stimulus

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Fed Minutes Show Worry About Economy, Need For More Stimulus

The minutes from the latest meeting of the Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve, show that there continues to be concern about the lingering effects of the coronavirus pandemic on the economy and the need for more stimulus.

Board members feel worried about economic recovery. It seems “somewhat less robust than in the previous forecast,” according to them. They also say the slow pace could pose a danger to the financial system.

They agreed to keep interest rates near-zero as the economy struggles to get back to pre-pandemic levels. Interest rates will remain at 0%-0.25% until they’re “confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.”

The meeting summary indicates that officials “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term.”

Monetary Relief Needed

Fed Chairman Jerome Powell and the rest of the members underscored the need for more monetary relief from Congress. This left Capitol Hill for the holiday recess without a new stimulus plan.

The minutes “underscored the need for a fiscal package. Chairman Powell has been adamant that we need to see another package,” Quincy Krosby, chief market strategist at Prudential Financial, said. He added that this is “especially because they see the negative effects of the slowdown.”

The Fed board also expressed concern that the economic slowdown could trickle over into the financial sector. This puts the banking industry at risk. They felt worried the virus could stick around longer than expected. They also worry about creating “more adverse” scenarios.

One tool that the committee appears to be hesitant to use is controlling the yield curve by putting a cap on interest rates beyond short-term rates.

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Officials’ Doubts

Officials continued to voice skepticism about its potency.

“Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee’s forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low,” the minutes said, adding “In light of these concerns, many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the FOMC could reassess in the future if circumstances changed.”

The committee also agreed it would provide the market with greater insight into its timetable for raising interest rates. However, it did not set a date for when it would begin giving out this information.

There was no mention of providing this insight at the central bank’s next meeting in September. Most on Wall Street expected the Fed would be ready to provide forward guidance during that meeting. However, the most recent minutes cast doubt on that timeframe.

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