Interest Rate Outlook: Political Battle Looms over Federal Reserve’s Emergency Programs

Vaccine Progress

Earlier this month, Pfizer and BioNTech announced that their COVID-19 vaccine proved to be more than 90% effective in early trial results, while Moderna reported that its version is 95% effective in protecting patients from the virus. Fed Chair Jerome Powell spoke with Bank of England governor Andrew Bailey and European Central Bank head Christine Lagarde at the ECB Forum on Central Banking last Thursday, and while he noted the positive developments in developing a vaccine, he also noted that it was too early to assess what the near-term effect will be on the economy.

Senate attempts to Confirm Shelton to Federal Reserve Board

Senate Majority Leader Mitch McConnell has so far been unable to confirm a controversial nominee, Judy Shelton, to the Federal Reserve Board. Shelton is an economic commentator and advisor to President Trump who achieved some notoriety by advocating a return to the gold standard and changing her positions on the Fed’s independent role following Trump’s election in 2016. Despite holding a majority in the Senate, Republicans were unable to secure enough votes in her favor on Tuesday as two GOP Senators were absent due to COVID-related precautions. Interestingly, McConnell did not start the process to confirm Christopher Waller, another nominee to the Fed Board, who has backing from both Republicans and Democrats.

Political Battle Looms over Federal Reserve’s Emergency Programs

The Wall Street Journal has reported that Democrats and Republicans are fighting over whether to let the Federal Reserve’s emergency lending facilities expire without renewal at the end of the year. The Fed and the Treasury Department launched these programs last March and April to stabilize the economy as states went into lockdowns in response to spikes in COVID-19 cases. According to Democrats, a decision not to renew the programs could erode confidence in the economy even though the programs are not currently heavily used. According to Republican Senator Pat Toomey (tapped to become Chairman of the Senate Banking Committee if the GOP retains the majority in January), the facilities have served their purpose and the government does not need to intervene further in the normalized markets. The programs particularly at risk are the Municipal Liquidity Facility which buys the short-term debt of states and municipalities, and the Main Street Lending Program which lends to small and medium-sized businesses and nonprofit organizations.

Fed Funds Futures Contracts

Source: Bloomberg

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