UPDATE 1-Fed expected to lift economic forecasts, extend vow to keep rates low

Sept 16- The Federal Reserve is expected to wrap up its latest policy meeting on Wednesday with somewhat rosier economic forecasts but a renewed pledge to keep interest rates low for as long as the world’s biggest economy needs to recover from its deepest downturn in decades. The two-day meeting is the U.S. central bank’s first under a newly adopted framework…

By Ann Saphir and Howard Schneider

Sept 16 (Reuters) – The Federal Reserve is expected to wrapup its latest policy meeting on Wednesday with somewhat rosiereconomic forecasts but a renewed pledge to keep interest rateslow for as long as the world’s biggest economy needs to recoverfrom its deepest downturn in decades.

The two-day meeting is the U.S. central bank’s first under anewly adopted framework that promises to shoot for inflationabove 2% to make up for periods, such as now, where it isrunning below that target. The strategy means the Fed will nottake its foot off the monetary gas pedal even if unemploymentcontinues to drop at a faster-than-expected pace.

Fed officials don’t appear ready to translate that frameworkinto an explicit promise to keep the central bank’s keyovernight lending rate in its current range of 0% to 0.25% untilcertain economic benchmarks – say, 2.5% inflation – are met.

The rate-setting Federal Open Market Committee is scheduledto release its policy statement and a summary of fresh economicprojections at 2 p.m. EDT (1800 GMT). Fed Chair Jerome Powell isdue to hold a virtual news briefing half an hour later.

“We expect the Committee to adopt this type of outcome-basedforward guidance by the end of the year,” Lewis Alexander, chiefU.S. economist at Nomura, wrote in a note ahead of this week’sFed meeting.

But the Fed is likely to close out this meeting with othersignals for its long-term commitment to easy monetary policy,Alexander and other analysts said.

The release of disappointing retail sales data on Wednesdayprovided a reminder of why the economy needs support.

Core retail sales, which exclude automobiles, gasoline,building materials and food services, declined 0.1% in August,the Commerce Department reported, a sign that the lapse of a$600 supplemental weekly unemployment benefit in July is hurtingconsumers’ ability to spend.

U.S. stock markets still opened higher despite that warningabout the risks to the U.S. recovery from the recessiontriggered by the coronavirus epidemic.

The Fed’s future steps may wait for a clearer view of theeconomy.

Those may include incorporating into the post-meeting policystatement the new “average” 2% inflation target and freshquarterly forecasts showing most if not all Fed policymakers seeno need to raise interest rates through at least 2023.

The Fed may also lean into its bond-buying program as ameans to support the recovery rather than to just supplyliquidity to fragile financial markets. Such a change wouldshore up expectations for a continued easy money policy withoutactually bolstering purchases.

DOVISH SURPRISE?

Still, there’s room for surprises on Wednesday, includingthe chance the Fed will provide more formal forward guidance oninterest rates, or a ramp-up in bond-buying that would signal amore muscular approach to economic stimulus.

“In both these cases, and especially the latter, the marketreaction could be quite dovish,” Cornerstone Macro economistRoberto Perli wrote on Monday.

Since Fed policymakers last met in late July, the economicoutlook has brightened somewhat. A scary midsummer spike indaily new U.S. cases of COVID-19 has subsided, though clustersof infections continue to surface around the country. More than195,000 Americans have died from the disease, according to aReuters tally.

The economy also has recouped about half of the 22 millionjobs lost in the first two months of the recession, unemploymenthas dropped to 8.4% from a crisis high of 14.7%, manufacturingactivity has increased and some measures of consumer spendinghave surged.

But much of the recent data suggests the recovery isslowing.

So while the summary of Fed policymaker projections isexpected to point to lower unemployment and faster economicgrowth than anticipated in the last round of forecasts in June,Powell will likely stick to his message that the road torecovery will be long and bumpy.

That may be doubly so because much of the government aid tosmall businesses and the unemployed contained in a $2.3 trillionspending package passed by the U.S. Congress in March is gone,and lawmakers are at an impasse over providing another aidpackage. A stopgap program to give the unemployed an extra $300every week – less than the now-expired $600 weekly supplementalpayment under the first rescue package – ended this month.

Powell and other Fed officials have repeatedly said theeconomic damage of the coronavirus crisis will be harder to undowithout new government aid.

(Reporting by Ann SaphirEditing by Paul Simao)

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