Fed may convey optimism on US economy despite stimulus deadlock

After a year in which the Federal Reserve pushed out unprecedented lending to support the economy while pleading for government stimulus that never came, central bankers could show early signs of optimism next week.

The policy-setting Federal Open Market Committee (FOMC) will open its final meeting of 2020 on Tuesday, capping a year that saw the world's largest economy contract massively due to Covid-19, and Joe Biden oust President Donald Trump in the November presidential election.

The Fed and its chair Jerome Powell likely will, as usual, steer clear of making any political statement, but experts say they likely will update their view on how the economy will fare in 2021 as vaccines against the virus are rolled out.

However, the outlook is not entirely clear.

"This is actually a pretty difficult FOMC to analyze," Steven Englander of Standard Chartered Bank said. "Picking up the pieces is going to be more complicated and will kind of look more complicated in six months than it does now."

Looming over the meeting is continued failure of Congress to pass another spending package to help the economy recover from the Covid-19 downturn -- something Powell and other central bankers have gently but persistently urged them to do for months.

Powell will hold a press conference after the meeting ends on Wednesday, but beyond more prodding, there is little he can do to close the thus far insurmountable gaps between Democratic and Republican lawmakers, Rubeela Farooqi of High Frequency Economics said.

"He's going to sound a concerned and cautious note about what's happening with the economy, but I don't expect him to take a strong tone on what needs to be done on fiscal policy," she said.

The central bank slashed its lending rate to zero when the pandemic arrived in March, and more recently unveiled a new inflation-targeting policy that will ensure the benchmark lending rate will remain lower for longer to maximize employment.

The Fed also rolled out trillions of dollars in lending and liquidity lines to keep markets functioning as business shutdowns to stop virus transmission stressed the economy.

Some of the loans were backed by government funds, and controversy erupted last month when Treasury Secretary Steven Mnuchin told the Fed to return hundreds of billions of dollars in unused loan money, shutting down several loan programs, prompting an unusual public protest from the central bank.

Democrats accused Mnuchin of trying to tie the hands of Biden, who will take office in January, but Englander said Powell and the politics-averse Fed is unlikely to address the issue further.

Absent stimulus and with its hands tied on more lending, analyst will be watching to see if the Fed makes good on its plans to change its bond buying strategy, which officials discussed doing at their meeting in November.

The Fed has been buying massive amounts of debt, and increasing purchases on longer-term Treasury securities could provide additional stimulus to the economy.

But Englander predicted the Fed will use the meeting to focus mostly on reassurance.

"The ideal would be, if they could come out not doing very much and certainly not doing much that would reveal divisions within the FOMC, but which would convey to the market in an emergency, or any sort of stress situation, they're going to be there," he said.

The Fed also will release its quarterly Summary of Economic Projects at the meeting, which will give an indication of how policymakers view the outlook over the next three years, factoring in recent good news on vaccines.

More upbeat growth forecasts could spook stock markets worried the Fed would remove the stimulus sooner than expected, Wells Fargo Securities said in an analysis.

However, the FOMC likely will continue "signaling it will be in no hurry to raise the fed funds rate," Wells Fargo said.