Paul Davidson
USA TODAYPublished 12:01 AM EDT Jul 28, 2020With at least 20 states pausing or reversing reopening plans amid coronavirus case spikes, the Federal Reserve this week could signal it’s moving toward an even more market-friendly strategy centered on near-zero short-term interest rates for years, economists say.At a two-day meeting that begins Tuesday, the central bank also could take steps to push long-term rates even lower.The Fed would seem hard-pressed to convey a more aggressive recession-fighting stance than it did last month. At a news conference after a meeting, Fed Chair Jerome Powell proclaimed, “We’re not even thinking about thinking about raising rates.” And Fed policymakers forecast that the central bank’s first rate hike won’t happen until at least 2022.Since then, however, nearly half the states, including Texas, Arizona, Florida and California, have suspended or rolled back business reopening plans by reclosing bars or making other moves to combat infection surges. The number of hours worked in several of those states has declined, according to Homebase, a supplier of employee scheduling software. And initial jobless claims, a measure of layoffs, rose the week ending July 18 for the first time since March.After the U.S. recouped about a third of the 22 million jobs lost early in the crisis in May and June, a sizable portion of those gains could be wiped out in July, says economist Kathy Bostjancic of Oxford Economics.“With the recent stalling of economic activity and rising risks of a double dip recession, we look for Chair Powell to retain a very cautious outlook,” Bosjancic wrote in a note to clients.The economy plunged into its steepest-ever recession in the second quarter, with a report this week forecast to show gross domestic product declining at more than a 30% annual rate. Recent economic data show the economy partly digging out of that hole the past couple of months, but analysts see growing risks of a slide back into recession after the virus spikes forced states to partly shut down again.Neither Morgan Stanley nor JPMorgan Chase expects any noteworthy changes to the Fed’s postmeeting statement, which vows to keep its key rate near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”A second stimulus check is likely coming: Another coronavirus stimulus check: What we know about the next round of paymentsThe Fed, however, already has been reviewing its monetary policy tools broadly and is expected in coming months to revise its 2% annual inflation goal by aiming for “average” inflation of 2% over time. Since inflation has been stuck below 2% for years, that suggests Fed policymakers will keep rates low enough to allow inflation to run above 2% for a period of time to make up for the low-inflation years. That would ensure the public expects 2% inflation over the long run, Goldman Sachs wrote a research note.The Fed is likely to announce that change at its September meeting, Morgan Stanley says, allowing the central bank at the same time to promise to keep rates near zero until inflation climbs above 2%. That’s significant because Bostjancic doesn’t expect inflation to reach the Fed’s 2% long-run goal and the return of full employment for another four years, keeping rates near zero until 2024. Goldman Sachs believes those targets won’t be met until 2025.Several of the economists predict the policy change will be adopted in September or November, though Bostjancic says it could occur this week. Yet even if the Fed waits, economists say Powell could well signal the change at his postmeeting news conference on Wednesday.The economy rebounds but for how long? The COVID economy in 6 charts: Rebounding from recession could prove tougher in months aheadThe Fed also is likely to nudge long-term rates lower. The central bank has been buying $80 billion a month in Treasury bonds and $40 billion in mortgage-backed securities, chiefly to resuscitate markets for those assets that had frozen amid fears during the crisis.  Economists, including Bostjancic and Goldman Sachs, expect the Fed to more explicitly state that the purchases are now intended to push long-term interest rates – such as for mortgages – even lower and stimulate the economy. That would let the Fed more effectively achieve that goal by purchasing bonds with longer-term maturities, Goldman says.


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