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Federal Reserve Meets Amid Major Uncertainties

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WASHINGTON — The Federal Reserve is meeting on the heels of an undecided presidential election and just before the October jobs report, which analysts expect to paint a complicated picture of an economy that is recovering, but which faces slowing progress and big risks.

Policymakers are likely to adopt a wait-and-see approach at the conclusion of their two-day meeting on Thursday, as they face an uncertain outlook and because they will want to avoid inserting the Fed into the election story line. But they could use the deliberations this week to lay the groundwork for future action.

The economy, which had bounced back swiftly as state and local lockdowns eased this spring, has seen its progress weaken as the pandemic persists and government support for households and businesses expires. Virus cases are surging again, leaving hospitals in some cities overburdened and raising the possibility of renewed closings in some jurisdictions.

To punctuate the moment of high drama, Americans headed to the polls this week, and the outcome of the election remains uncertain. It seems possible that Joseph R. Biden Jr. could capture the White House while Republicans retain the Senate, leaving the government divided and possibly cooling the prospects for a big relief package.

The increasingly perilous economic outlook and shifting political landscape could shine a renewed spotlight on the Fed. If fiscal support is not forthcoming, its policies could be crucial to helping the recovery limp through the pandemic this winter. Yet another key question lingers: Even if policymakers want to act decisively, how much more can they do with interest rates already near zero?

“They’re not completely out of ammunition,” said David Wilcox, a former director of the research and statistics division at the Federal Reserve Board in Washington. But “by and large, at this point,” he added, “the onus is on fiscal policy to step up and rescue a situation that I am pretty concerned about.”

Here’s what to look out for at this week’s meeting.

The Fed cut interest rates to near zero in March, announced later that month that it was willing to buy unlimited quantities of bonds to soothe troubled markets, and has since June pledged to buy “at least” $120 billion in government-backed bonds each month.

The central bank clarified in September that those purchases were meant to bolster lending and spending, in addition to supporting markets, but analysts are looking for more.

Many economists believe Fed officials could extend the duration of their bond portfolio — meaning that they will start buying longer-dated bonds in a bid to push down rates on such securities. The point is to make many types of credit cheaper, which could help support borrowing and demand. Minutes from the Fed’s September meeting suggested that officials might discuss and refine communication around their balance sheet plans at coming meetings, but few economists expect major moves this soon.

“The committee does not seem ready, and likely thinks that to ease immediately after the vote would look political and it would be better off waiting for the dust to settle,” economists at Evercore ISI wrote in a note previewing the meeting.

The Fed introduced a suite of emergency lending programs to keep markets functioning and credit flowing as critical parts of the financial system seized up in March and April. Some have been very successful, allowing money to flow in corporate debt markets. Other, never-before-tried efforts — including a midsize business lending program and a municipal bond-buying effort — have been only lightly used.

Now, the programs backed by funding from pandemic relief legislation are at a crossroads. They are set to expire at the end of December, and the Fed chair, Jerome H. Powell, and the Treasury secretary, Steven Mnuchin, must decide whether to extend them into 2021. In responses to congressional questioning, Mr. Mnuchin has suggested that he is in favor of allowing least one — the municipal bond program — to wrap up.

There are big questions around what it would mean if the whole suite of programs were allowed to sunset. On one hand, markets are operating smoothly now, and the Fed has demonstrated a willingness to step in that may keep them calm even in the absence of actual programs. Yet eliminating the formal backstop just as the nation plunges into renewed stress, with election uncertainty and virus cases on the rise, could undermine confidence.

“I do think it matters — you need to see those facilities extended, particularly if you’re not going to see stimulus,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “Just having that backstop has been a really important signal to the market that the Fed is there.”

Mr. Powell is sure to face questions about whether the programs will be allowed to lapse at his news conference after the meeting. The issue is flying under the radar for now, but that might be because investors take for granted that the programs will be extended.

“Most people seem to assume they’ll renew them automatically,” said Roberto Perli of Cornerstone Macro. “It’s an issue the market hasn’t digested well yet.”

The news conference could be the star of this meeting’s show. Given the expected lack of concrete action, the tone Mr. Powell strikes during his virtual postmeeting remarks, which will start around 2:30 p.m., could be the most important thing to come from the November gathering.

He is likely to continue to pledge a very long period of rock-bottom interest rates. And he may sound at least somewhat worried, given the economic backdrop.

It is worth noting that while the Fed chair has historically had an early glimpse of critical numbers from the jobs report — the White House Council of Economic Advisers has sent data on participation, unemployment and wages the night before — Mr. Powell would not have the figures in hand by the time of the Fed decision and news conference. People familiar with the process said that the reports generally came in later in the day.

What data Mr. Powell will have in hand are wobbling.

Manufacturing gauges have shown improvement, but one services industry tracker has begun to soften and data from the private payroll processing company ADP suggest that private sector employment gains are weakening. While those figures do not always tie in closely with the official government report, the median economist in a Bloomberg survey expects that job gains slowed to about 590,000 in October — relatively slow progress at a time when millions remain unemployed.

Mr. Powell may continue to suggest that additional government support for hard-hit households is necessary, as he has taken to doing, but prospects for a big package seem to have dimmed.

“Everyone was counting on a pretty sizable fiscal package,” Mr. Perli said in an interview Wednesday morning. “Who’s going to pick up the slack? There’s going to be more burden on the Fed.”

He noted that while it was unclear how much, and how effectively, the central bank could help at this point, “that doesn’t mean the Fed can say, ‘There’s nothing I can do here, goodbye.’”

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