While Tuesday’s U.S. presidential election occupies center stage this coming week, there are several key economic events in the wings that will deepen understanding of the current health of the U.S. economic recovery and may provoke some market volatility.
Federal Reserve officials face a bit of a “toxic cocktail” when they gather for their next policy meeting on Wednesday and Thursday, said Kathy Bostjancic, chief financial economist at Oxford Economics as Covid-19 cases are on the rise, payroll gains are moderating, and fiscal aid is expiring.
However with benchmark interest rates stuck at zero and the Fed unwilling to move them into negative territory, economists think the central bank will focus on using its bond-buying program to help the economy, perhaps by increasing the quantity and average maturity of purchases.
The Fed is already purchasing $120 billion per month of Treasurys and mortgage-related assets, a pace that is faster than at any time since the 2008 financial crisis. At the moment, the policy on asset purchases is a commitment to continue them “at least at the current pace.”
Most, but not all, economists, think the Fed will hold off adding to purchases.
By simply repeating its policy pledge, the Fed has “room to accelerate them” if Congress fails to reach agreement on another fiscal stimulus package, bond yields press higher, or economic data sour, said Avery Shenfeld, chief economist of CIBC Capital Markets.
Other analysts think the Fed could act this coming week.
“Don’t count the Fed out,” said Aneta Markowska, economist at Jefferies Financial Group.
The Fed has been worried about three risks that have materialized: lack of fiscal support, a new wave of COVID infections, and a tightening of financial conditions, she noted.
“These are all compelling reasons for the Fed to ease now, rather than wait until December,” Markowska said.
Fed Chairman Jerome Powell will likely use his press conference on Thursday to press Congress for more fiscal stimulus from Congress.
“Fed officials are screaming as loud as they can for a fiscal package for a reason. It is pretty much all they can do to support the economy now,” said Michael Pearce, senior U.S. economist with Capital Economics.
Fed officials will have a good sense of the state of the job market but confirmation will come Friday when the government will release the October jobs report. Economists think the data will reflect a slowing labor market recovery.
Economists expect about 600,000 jobs were added in October, down from 661,000 in September. The unemployment rate may fall again to 7.7% after dropping to 7.9% in September from 8.4% in the prior month, but that decline has more to do with people leaving the job market in frustration.
Over 10 million jobs have been lost during the pandemic and permanent job losses are on the rise.
Pearce of Capitol Economics said the pandemic-economy is not friendly for the labor market. While consumers are buying manufactured goods, they are shying away from the in-person service sector, where the bulk of Americans used to find work.
The strong factory sector though will be on display on Monday when the Institute for Supply Management releases its closely-watched manufacturing index for October.
Economists are looking for an uptick to 55.6% for the manufacturing purchasing managers index as the factory sector has been humming along. The index slipped to 55.4 in September from the prior reading of 60. That’s well above the break-even growth rate of 50.