Fed’s High-Wire Act Becomes Trickier

The Federal Reserve’s top policy-making committee will meet this week facing significant crosscurrents: How best to balance a dimmer short-term economic outlook with a brighter longer-term one, and how to maintain highly stimulative monetary policy notwithstanding the prospects of significant fiscal expansion. While the Fed is likely to err again on the side of ultra-dovishness, economic and market issues are increasing the challenges of doing so.

With Friday’s data from purchasing managers being a notable and welcome exception, recent economic reports have pointed to a slowdown in the U.S. economic recovery. A weakening labor market and contracting retail sales highlight a service sector that is again coming under pressure because of direct and indirect disruptions related to Covid-19. While the virus-related measures announced recently by President Joe Biden are greatly needed for the longer-term well-being of America’s public health and economy, they will most likely curtail travel and other activities in the weeks ahead. Meanwhile, Europe is falling into a second-dip recession that is said to have Germany considering a significant downward revision to its projected growth rate for 2021 to around 3% from 4%.