The Fed sent a more dovish message at the July meeting, although the monetary policy, as well as the accompanying statement, stayed largely unchanged. Despite improvement of data flow, the members warned that the pace of recovery is depending on the developments of coronavirus pandemic. Fed Chair Jerome Powell at the press conference also reiterated the view that “until the public is confident that the disease is contained, a full recovery is unlikely”. Powell also signaled that enough progress has been made on the monetary policy framework review and the members will “wrap up our deliberations in the near future”.

Only few changes were made in the accompanying statement, focusing on the economic outlook. In June, policymakers acknowledged that “the virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses”. This is replaced this month by the reference that “following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year”. Concerning the recovery, the Fed stressed that “the path of the economy will depend significantly on the course of the virus”.

On the monetary policy, the Fed funds rate is left unchanged at 0-0.25%. The forward guidance also stayed unchanged, with the members affirming that the policy rate will stay at the current level “until it is confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals”. The members also announced to leave the asset purchases at a monthly pace of US$80B for Treasuries and US$40B for MBS. The only change in the policy is extension of dollar repo and swap lines through to March 31.

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Powell sounded more dovish at the press conference. He suggested that “we have substantially, not fully restored functioning markets” through asset purchase programs. This is in contrast with market expectations that the market functioning has been smoothed over the past months. Comments about the monetary policy outlook were largely the same as what he said before the Congress last month and consistent with the median dot plots released at the June meeting. As he noted, “Don’t look to us to cut back on facilities or policy for a very, very long time” and “We’re not even thinking about thinking about raising rates”. The median dot plots projected that there will be no rate hike throughout the 2020–22 horizon. Powell affirmed that the central bank has “ways to further support the economy, certainly through our credit and liquidity facilities, which are effectively unlimited”, including adjusting the programs and the forward guidance. Yet, he indicated that the Fed has not decided on the form of potentially altered guidance. We continue to expect the Fed will shift to an outcome-based forward guidance in September.

At the press conference, Powell signaled that enough progress has been made on the monetary policy framework review and the members will “wrap up our deliberations in the near future”. He reinstated the comments at the June minutes that completion of the framework review will inform the policy changes. We continue to expect changes in the monetary policy will likely be announced in September. These would include an outcome-based forward guidance linking the timing of the rate hike to full employment and inflation target, an average inflation targeting framework and a transition to traditional asset purchases.

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