FOMC Minutes Preview: Watching for hints of negative rates

The Federal Reserve April meeting was almost an afterthought as the bank’s three unscheduled March meetings produced 1.5% in rate cuts, a restart of quantitative easing, enhanced central bank swap lines and a more than two trillion dollar domestic loan program.

Fed funds rate

FOMC minutes and Projection Materials

Minutes from that meeting are not expected to provide any new clues to the bank’s future policies but they will be scrutinized for hints to the missing economic and rate projections and discussions of negative interest rates. 

Normally the economic expectations of the staff and FOMC members are formulated and issued quarterly at the March, June, September and December meetings. Since the March projections were not released in April and the materials are scheduled for June, it appears that the unusual conditions around the pandemic have cancelled the first quarter release.

In the swiftly changing events of the last two months the Fed’s policy responses have necessarily superseded the formal meeting structure of the official policy body, Federal Reserve Open Market committee (FOMC).

The minutes are likely to have a gloomy cast as the initial jobless claims numbers of the first three weeks of the month that had just outlined the depth of the historic unemployment disaster were fresh and unmitigated.  

Discussions in the edited minutes may seem somewhat out of date as the national conversation in the almost three weeks since the meeting has rapidly moved from the revelations of the economic debacle to the apparent success of several states in reopening parts of their economies and considerations about the criteria for opening the others.

Negative rates and the dollar

Although there has been considerable public and media speculation that the Fed might be forced to follow fed futures into negative rate territory, Mr. Powell has said that the central bank is not considering negative rates as it “doesn’t see much benefit to them.”  But with the ECB, the Bank of Japan and many national central banks in Europe below zero the questions will not cease until the US is clearly on the road to economic recovery.

Any positive mention of negative rates or compliments for European policies could be damaging to the US dollar.

Powell and Mnuchin in Congress

The Fed Chairman and Treasury Secretary Mnuchin appeared in a virtual meeting of the Senate Banking Committee one Tuesday as part of the CARES Act, (Coronavirus Aid, Relief and Economic Security Act) the federal government’s pandemic support legislation.  

 In his prepared remarks Mr. Powell noted…the scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II.”

 “We expect to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.”

Both officials stressed that Washington’s two main responses to the economic crisis are complementary and will be reinforced and extended as necessary until the US is well on its way to recovery.