Heading into Tuesday and Wednesday’s FOMC meeting, officials struck a cautious tone. In their December Beige Book, or collection of anecdotes about economic activity released ahead of each Fed meeting, the central bank said that most Federal Reserve districts “characterized economic expansion as modest or moderate,” while four districts “described little or no growth, and five narratives noted that activity remained below pre-pandemic levels for at least some sectors.”
Many Fed officials over the past several months have also reiterated that their monetary policy efforts work most effectively in tandem with strong fiscal stimulus from congressional lawmakers, though those on Capitol Hill have remained at a months-long stalemate over the size and scope of another virus-relief bill.
Given this, the Fed’s revised Summary of Economic Projections set for release this week will be of particular interest. In September, Fed officials upgraded their outlook for the U.S. economic recovery to see a 3.7% contraction in real gross domestic product (GDP) this year, or better than the 6.5% drop they anticipated in June. They also expected the labor market to end the year at a 7.6% rate at the time in September, while taking until 2023 to reach 4.0% to close in on pre-pandemic levels. The Federal Reserve also signaled in September that interest rates would likely remain at their current near-zero level until at least 2023.
“Though positive news on the vaccine front has likely brightened the medium-term outlook for the Fed, near-term uncertainty on the trajectory of the virus and the fiscal outlook should result in a still-cautious tone to the FOMC meeting statement and Chair [Jerome] Powell's presser,” Matthew Luzzetti, chief U.S. economist for Deutsche Bank, said in a note Thursday.
And importantly, the Fed may use December’s monetary policy statement and press conference to discuss forward guidance around asset purchases, which have been a key tenet of its strategy to stimulate financial market activity during the coronavirus crisis.
For now, the Fed’s quantitative easing program has involved purchasing $80 billion worth of Treasuries each month, along with $40 billion in mortgage-backed securities. In the Fed’s latest November monetary policy statement, the central bank suggested this rate of purchasing would continue, saying it planned to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning.”
“Officials have hinted they could make the pace of purchases more conditional on economic conditions. They may also make the point that tapering of purchases must happen before they would even consider raising interest rates more forcefully,” James Knightley, ING chief international economist, said in a note Thursday. “This may, at the margin, help to press down borrowing costs.”
Retail sales
Recent data on Black Friday and Cyber Monday spending shattered records, with a surge in online purchases buoying results. Yet economists still expect that retail sales on the whole turned negative in November for the first time since April.
Consensus economists expect U.S. retail sales dipped 0.3% in November after rising by the same margin in October. That, in turn, had been the slowest pace of increase since April’s record decline, as consumption tapered off following an early surge after the initial lockdowns in spring were lifted.
One major drag on November’s retail sales will likely come from a drop in service-related spending, as renewed stay-in-place restrictions and colder weather pressured activity at places like restaurants and bars.
“Many local authorities reduced indoor dining capacity and hours at restaurants and bars as COVID-19 cases and hospitalizations rose sharply in November,” he added. “In some populous regions (e.g. areas in Illinois and California), indoor dining was halted completely. In addition, more cautious individual behavior amid negative news coverage may have weighed on receipts at restaurants.”
Reference: Yahoo Finance
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