WASHINGTON — The Federal Reserve is widely expected to leave interest rates near zero on Wednesday while pledging to continue buying bonds, but economists are watching for any hint about how the central bank might adjust policy in the longer run.
Officials are set to release their first set of economic projections of 2020, having skipped the quarterly summary in March as the pandemic gripped the United States, sowing uncertainty. The forecasts will show how they expect unemployment, inflation and growth to shape up in the years ahead.
Many Fed watchers expect officials to use the interest rate projections and their post-meeting statement, released at 2 p.m., to clearly signal that borrowing costs will remain at rock-bottom for some time. Policymakers could also use the statement to make clear they will try to goose the economy through their bond-buying program. The Fed has been snapping up government-backed bonds to keep markets functioning normally, but conditions have calmed, so they could make that program explicitly focused on stimulating the economy.
But the more significant moment may come when Fed Chair Jerome H. Powell holds a web-based news conference at 2:30 p.m. While he has sounded wary about the path ahead, analysts are curious to hear his take on the economy as states gradually open and the job market stages an early rebound.
“At a minimum, I imagine he’s encouraged that the recovery process has started,” said Michelle Meyer, head of U.S. economics at Bank of America, but he will most likely remain cautious. “What kind of damage has been done to the labor market, to small business?”
He could also provide further information about the Fed’s emergency lending facilities, many of which are backed by a $454 billion pot of money Congress appropriated.
Here’s what to watch.
The Fed’s last statement, released in late April, declared that the Fed “is committed to using its full range of tools” to support the U.S. economy, a pledge officials are likely to uphold this time around.
The central bank has already taken drastic actions to support the U.S. economy. Officials cut interest rates to near-zero in back-to-back emergency meetings in early March, announced an unlimited bond-buying program to restore order in troubled government debt markets, and have since unveiled a range of emergency lending programs to keep credit flowing through the economy.
Many of those lending efforts, backed by money from the $2 trillion economic stimulus bill, go even further than the Fed did during the 2008 financial crisis. Two programs buy corporate debt, one buys municipal debt, and the so-called Main Street program will make loans via banks to midsize businesses.
But economists think the Fed could still do more. It could make its bond-buying program, commonly called “quantitative easing,” explicitly focused on stimulating the economy, rather than just keeping markets functioning. That change would send a signal that the program is poised to continue even as market conditions return to normal. Officials could also specify a monthly pace, instead of the open-ended purchasing underway now.
“We think they are more likely than not ready to announce a concrete pace,” Ms. Meyer said. “They will want to nail it down.”
Some expect that the Fed could also institute more formal “forward guidance,” in which officials pledge to keep rates low for either a specific time period or until a certain economic goal — like a level of unemployment — is achieved. But many think they will wait and institute those changes later this year, after they have finished a policy strategy review that was underway when the pandemic hit the economy.
“Our read on the tea leaves is that they haven’t completed the framework review, so they don’t have a consensus,” said Michael Gapen, chief U.S. economist for Barclays.
The economic forecasts will be a major focus given that the last time they were released — December 2019 — Fed officials were projecting 2020 unemployment to close out at 3.5 percent with 1.9 percent inflation and 2 percent growth.
The coronavirus most likely upended those expectations. Unemployment rocketed to 14.7 percent in April before easing to 13.3 percent in May. Economic activity tanked so sharply as states issued stay-at-home orders in March and April that the National Bureau of Economic Research announced this week that the United States entered a recession after the economy peaked in February.
There is no doubt that the economy has experienced a rapid, sharp hit. The major question is how quickly the country can recover — and Wednesday’s release will offer a sense of how the Fed is thinking about that.
“G.D.P. growth is obviously going to be down,” said Lewis Alexander, the U.S. chief economist at Nomura. One thing to watch is whether there is any disagreement about whether interest rates will remain near zero through 2022, which is when the year-specific forecasts end.
“The most interesting thing will be what the interest rate forecast will look like,” he said.
Mr. Powell, the Fed’s leader since early 2018, has voiced caution since the pandemic took hold. He has warned that both monetary and fiscal policy must stand ready to do more to make sure the pandemic does not permanently scar the economy, and he has been clear that the Fed does not mistake its early successes in calming markets and reinvigorating lending as giving an all-clear signal.
“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risk,” Mr. Powell said on May 13.
But since he last spoke, some economic data has come in above expectations. Unemployment was projected to increase to around 20 percent but it declined instead. Consumer spending is rebounding, though it remains below precrisis levels, based on real-time trackers. As a result, the Fed chair might update his cautious take, economists said.
He is also likely to field questions about the Fed’s various credit programs. The central bank’s corporate bond-buying and municipal bond purchases only recently started, and it announced just this week that it would expand its Main Street program to reach a broader array of business borrowers. Still, questions linger about how widely the programs will be used — and how officials will judge whether they have been successful.
Mr. Powell could also address questions about whether the virus poses risks to the global financial system, including banks.
Officials at the Fed’s April meeting “were concerned that banks could come under greater stress, particularly if adverse scenarios for the spread of the pandemic and economic activity were realized,” the minutes of the gathering showed. Those risks were “exacerbated by high levels of indebtedness” among corporations.
Large banks have just completed their annual “stress tests,” which gauge their ability to weather a downturn and determine how much capital they need to hold to absorb losses. Mr. Powell could offer more details about the pandemic-specific scenarios that were quickly incorporated into the 2020 examinations.
Some officials have said that the Fed Board in Washington — which oversees bank regulation — should prevent the largest banks, which have voluntarily suspended share buybacks, from paying out dividends. Randal K. Quarles, the Fed’s vice chair for supervision, has suggested that they are waiting to see the stress test results before making that call.
“Our regulatory framework requires us to do that analysis, and that will determine the ability of the banks to conserve capital,” Mr. Quarles said in May.
Results of the 2020 “stress tests” will be released on June 25, the Fed said on Tuesday.