By Nick Timiraos 

Federal Reserve officials head into their next policy meeting deliberating how to assist an economy in a deeper hole than it faced after the 2008 financial crisis at a time when their tools might have less zip.

They are likely to debate how to adjust their plans to purchase Treasury and mortgage assets and how to make more concrete their assurances to keep interest rates near zero for some time.

Officials have indicated in recent public statements and interviews that they don't feel hurried to announce details of their strategy at the conclusion of their June 9-10 meeting.

They cut interest rates to near zero in March as the coronavirus pandemic worsened. They affirmed plans in April to hold rates there until they are confident the economy is on track for inflation to rise to their 2% target and unemployment to fall to the low levels of recent years.

"It's going to take some time for us at the Fed to get a sense of what this economy, what the rebound potentially can look like," Fed Vice Chairman Richard Clarida said in an online forum last week. The Fed should have a better handle on the economy's path by September, he said.

The extraordinary nature of the current downturn -- stemming from the virus and related shutdowns of economic activity -- leaves the central bank with no playbook.

"It is hard for the Fed to proceed with the next round of potential [policy] escalations because they don't really know how the pandemic will proceed and then how long the weakness in economic activity will prevail," said William Dudley, who was president of the New York Fed from 2009 to 2018.

Officials are set to release new economic and interest-rate projections at the June meeting after scrapping those quarterly projections in March.

With rates unlikely to go lower, two elements of officials' policy stance are taking center stage in their deliberations: how to manage the pace of bond purchases and how to communicate their long-run intentions, using what is known as forward guidance.

Fed leaders have said they will also study whether to cap yields on certain Treasury securities by purchasing the amounts needed to reinforce their forward guidance.

Yield caps, which the Fed employed during and after World War II, would represent a hybrid of asset purchases and forward guidance and could limit any unwelcome jump in Treasury yields due to a coming surge of government-debt issuance to finance virus-related economic relief approved by Congress and the White House.

Such caps are "something we're going to need to discuss," said Dallas Fed President Robert Kaplan in an interview. "And I'm cognizant of the fact that we're going to have a substantial amount of Treasury issuance, including to finance the stimulus for this pandemic."

One of the areas that might need clarification sooner is around asset purchases. The Fed doused a financial panic in mid-March by purchasing huge quantities of Treasurys and mortgage bonds after investors dumped long-dated securities in a flight for cash.

Officials have said their purchases, totaling more than $2.2 trillion since mid-March, are designed to restore orderly market function. This rationale is different from their prior open-ended round of asset purchases, conducted between 2012 and 2014, which was designed to stimulate hiring and investment.

They have been gradually reducing their purchases every week. They are buying Treasurys, for example, at a pace of $25 billion this week, down from $50 billion four weeks ago and a peak of $375 billion nine weeks ago.

The Fed is preparing to shift gears from purchasing assets to improve market function toward an aim to provide more stimulus, but "they've been a little unclear about where they are in that transition," said Mr. Dudley. "It would be useful for them to clarify the asset purchases: Why are we doing it? What are our objectives? At what size?"

Recent New York Fed surveys revealed market participants have a range of estimates about the size of those future purchases, suggesting the potential for confusion about the central bank's intentions.

Fed officials also face questions over how to design their forward guidance given uncertainty over the nature of the current shock. Last decade, the Fed used guidance to push back against market expectations of higher rates. But today, futures contracts imply investors don't see the central bank contemplating rate increases for three or four years.

As a result, "I don't know that there's a need for guidance at the moment," Chicago Fed President Charles Evans told reporters earlier this month. "We have the time to think about this."

Fed officials' deliberations will draw on a strategy review the central bank conducted over several meetings last year focused on how to bolster its arsenal for periods, like now, when rates are pinned near zero. Officials have largely ruled out experimenting with negative interest rates.

Economists have warned that while financial markets are functioning better amid aggressive Fed action in recent months, the lifting of lockdown orders could reveal deeper, recessionary levels of output than expected.

The degree of economic deterioration could call for an extreme amount of Fed support, and "we are skeptical that forward guidance and asset purchases can fill the gap," said David Mericle, an economist at Goldman Sachs Group Inc., in a recent report.

During their review last year, Fed officials were close to signing off on changes that would have made up for periods of inflation running below their 2% target, as it did for most of the past decade, with periods of slightly higher inflation.

That process revealed enough about how the Fed will react to changes in the economy so there is less urgency to immediately unveil more explicit guidance, said Mr. Dudley. "They already told us they wanted to see inflation above 2% before the pandemic took hold."

One strategy likely to receive serious consideration would be to tie future plans to raise interest rates to achieving specific economic outcomes, especially around inflation.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

May 29, 2020 05:44 ET (09:44 GMT)