Federal Reserve policymakers, still working to fully roll out a multi-trillion-dollar effort to shore up financial markets and an economy cratered by the coronavirus pandemic, last month dove into a new debate: how best to support the economy during a recovery they now agree could be slower and more fraught than initially thought.
Among ideas U.S. central bankers discussed at April’s policy-setting meeting, according to minutes released Wednesday: more detailed guidance for the path of short-term interest rates, and capping long-term interest rates.
The Fed used the former in the last crisis; the latter would be a first for the Fed.
There was no discussion of negative interest rates, a controversial approach to policy supported by U.S. President Donald Trump and in use in Europe and Japan, but seen by U.S. central bankers as risky and ineffective.
With tens of millions of Americans without work in an economy expected to shrink at its fastest rate ever amid widespread business shutdowns to limit the virus’ spread, the Fed has embarked on an all-out effort to calm markets, forestall mass bankruptcies, and set the stage for a faster recovery.
It has slashed interest rates to near zero, bought trillions of dollars of bonds, and initiated a raft of lending programs, including one for medium-sized businesses which it hopes to launch later this month.
At their April 28-29 meeting, policymakers re-upped a pledge to keep interest rates near zero until they are confident the U.S. economy is on track to recovery, but they also were sharply focused on continuing to deliver support to a nation that some worried could experience a “protracted period of severely reduced economic activity,” especially if new waves of infection emerged.
“While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions,” according to the minutes, released Wednesday with the usual three-week lag.
Some participants called for more precise forward guidance for the path of interest rates, like tying any change to rates to achieving specific economic milestones on unemployment or inflation, or to specific dates, an approach the Fed used during the last crisis.
Other possibilities discussed included giving guidance on bond purchases, the minutes showed, and using Treasury purchases to cap long-term borrowing costs, an approach employed by some other global central banks.
Completing a monetary policy framework review launched last year, several policymakers thought, could also help clarify the Fed’s policy intentions.
“Fed officials remain concerned the pandemic could have more long-lasting effects,” said Paul Ashworth, chief U.S. economist for Capital Economics.
Participants overall agreed that their recent actions had been “essential in helping reduce downside risks to the economic outlook,” the minutes showed. They also repeated calls for further fiscal support, which so far has amounted to nearly $3 trillion even as lawmakers continue to debate the size and scope of a further rescue package.
But with a number of Fed policymakers seeing “a substantial likelihood of additional waves of outbreak in the near or medium term,” the minutes suggested central bankers may be reaching for better tools to navigate what could be a rocky recovery.
More than 36 million U.S. workers have filed unemployment insurance claims since mid-March when states began putting stay-at-home orders in place. Economists expect the unemployment rate to approach or surpass the 25% record set during the Great Depression. Forecasters say they expect the U.S. economy to shrink by as much as half this quarter, on an annual basis.
States are now easing restrictions, raising the hope of a gradual return to economic growth in the third and fourth quarters, but also the risk of new infections and more death.
More than 90,000 Americans have died of the highly contagious respiratory illness the virus causes, with daily deaths averaging 1,600 a day this month.