skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

16 September 2020

Progress and Some Unanswered Questions at Today’s FOMC Meeting

By John L. Bellows, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

The context for today’s Federal Open Market Committee (FOMC) meeting had a number of crosscurrents. On the one hand, the US economy has handily outperformed consensus expectations over the last few months. Consensus forecasts for growth and employment have been upgraded accordingly. On the other hand, the economic damage caused by Covid is still quite substantial (payroll employment remains 10 million jobs below where it was in February), and there are real concerns about the unevenness in the recovery across sectors and income groups.

Likely due to these multiple crosscurrents, many members of the FOMC had indicated a desire to wait for more clarity on the economic outlook before announcing any changes to policy. While the desire for clarity is perhaps understandable, waiting to make policy announcements risks undermining investors’ confidence in the Fed’s ultimate goals. Fed Chair Powell has previously said that the public should count on the Fed to be there to support a vigorous recovery. That type of statement suggests that the Fed’s support is not conditional on how exactly the next few months play out. To the contrary, in order for the public to have confidence in the Fed’s commitment, the understanding should be that the Fed will be there to support the recovery regardless of how the next few months unfold.

The FOMC decided today that it was better to go ahead and make some policy announcements sooner rather than later. Specifically, the post-meeting statement introduced forward guidance on the future path for interest rates. The acceleration of the forward-guidance announcement, even though the outlook remains somewhat unclear, was a surprise to many who thought the desire to wait for clarity would carry the day.

The guidance was also somewhat more ambitious than many expected. In particular, the guidance specifies a three-part test, in which all three criteria must be met to justify an increase in interest rates. In order for the FOMC to raise interest rates: (1) inflation must have “risen to 2%,” (2) inflation must be “on track to moderately exceed 2% for some time” and (3) the labor market must be at “maximum employment.” This is the first mention of inflation exceeding 2% in an official post-meeting statement. By including it today the FOMC is promising to make good on the new average inflation targeting framework. The “maximum employment” condition is also notable. The focus on employment is consistent with the emphasis in Powell’s Jackson Hole speech at the end of last month. Moreover, as any student of undergraduate statistics can tell you, specifying a third condition necessarily lowers the probability that all the conditions will be met in a given period.

The announcements today were incomplete, however, as the FOMC left unanswered a number of questions about its asset purchase program. The post-meeting statement did include that the Fed will continue to purchase assets at least at its current pace ($80 billion of Treasury securities and $40 billion of MBS per month), and it also characterized those purchases as “fostering accommodative financial conditions.” What remains unclear is how long those purchases will continue and whether there will be any changes to the composition of purchases. Powell was pushed on both points during the press conference. His responses indicated that the FOMC has not yet decided, but it is considering all of the various dimensions of the program.

Our view had been that the magnitude of the current economic challenges, together with an unmistakably accommodative bias from Fed policymakers, meant the odds favored that the FOMC would continue its purchases for some time and eventually adjust its purchases toward longer-dated securities. The lack of progress today has made that outlook less clear, although it’s important to note that no options have been ruled out and the debate is ongoing. At a higher level, leaving questions unanswered may have the unintended consequence of undermining investors’ confidence in the Fed’s commitment. That would be a shame, especially as the Fed appears to have gone out of its way to accelerate the forward guidance announcement in order to address precisely that type of issue.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.