Fed minutes reveal a more pessimistic projection filled with uncertainty

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The COVID-19 pandemic creates "uncertainty and considerable risks" to the economy in the medium term, according to minutes of the Federal Open Market Committee’s April meeting.

"Participants commented that, in addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term," the minutes state. With restrictions "gradually" lifted later this year, participants still expect GDP to "rise appreciably and the unemployment rate to decline considerably" later this year, according to the minutes released on Wednesday.

Weaker inflation is seen, as consumer energy prices drop and resource use falls.

“Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years,” the minutes said. “The staff observed that uncertainty regarding the economic effects of the coronavirus outbreak was extremely elevated and that the historical behavior of the U.S. economy in response to past economic shocks provided limited guidance for making judgments about how the economy might evolve over coming quarters.”

The FOMC April minutes say second quarter activity will decline at an unprecedented rate.

The staff also concluded that due to the “significant uncertainty” surrounded with the coronavirus and how long it will take to recover, that “a more pessimistic projection," should the virus reemerge in the fall "was no less plausible than the baseline forecast.”

The second quarter is ground zero, with overall economic activity likely to "decline at an unprecedented rate,” the minutes said.

A number of participants commented on potential risks to financial stability.

“Participants saw risks to banks and some other financial institutions as exacerbated by high levels of indebtedness among nonfinancial corporations that prevailed before the pandemic; this indebtedness increased these firms’ risk of insolvency.”

The Fed remains committed to using all its tools to support the economy. And participants see the fed funds rate target remaining at zero lower bound "until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals."

And with rates expected to stay at zero to 0.25%, it was suggested the FOMC "could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions,” the minutes said. “Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit.”

For example, the committee could adopt outcome-based guidance offering the levels of unemployment and inflation that needed to be achieved before rates would rise.

“The Committee could also consider date-based forward guidance that would indicate that the target range could be raised only after a specified amount of time had elapsed,” the minutes said.

Concerns about the finances of state and local governments contributed to a marked deterioration in credit conditions in the municipal bond market in March.

“Although strains lessened amid Federal Reserve announcements on emergency lending facilities to support the flow of credit and liquidity to state and local governments — specifically, expansions to the MMLF and the CPFF and the establishment of the Municipal Liquidity Facility — spreads remained high and issuance subdued at the end of the intermeeting period,” the minutes said.

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