• As expected, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at the effective lower bound range of 0.0% to 0.25% and maintained its commitment to expanding its balance sheet “at least at the current pace.”
  • The statement opened with an acknowledgment of the recovery that has taken place to date, but also that both economic activity and employment “remain well below their levels at the beginning of the year.”
  • The statement added that “the path of the economy will depend significantly on the course of the virus.” It maintained its guidance that “the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
  • As in June, the statement noted that the committee “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Key Implications

  • There was very little new in this statement, but its explicit acknowledgement that the economic outlook depends on the country’s success in mitigating virus gives it a slightly dovish hue. The Federal Reserve will continue to provide all the support it can, but ultimately, the economy will not recover fully until the health crisis has passed.
  • The U.S. yield curve is extremely flat and market rate expectations are anchored at zero (or lower) well into the future. As such, the most effective way to increase accommodation may be to raise inflation expectations. Adopting an average inflation regime in which the Fed must overshoot its 2% target in order to make up for its past undershoot, could go a long way to supporting this goal.
  • The statement did not make mention of fiscal policy, but you can bet that Chair Powell will at his virtual press conference. As he has in the past, we expect him to encourage Congress to come together on another fiscal support package.

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