By Nick Timiraos 

Federal Reserve officials are likely to unveil this month new guidance about how long they expect to continue their current asset-purchase program.

The approach, which would be detailed at their Dec. 15-16 meeting, would align the program with conditions they spelled out in September about how long they expect to keep interest rates near zero.

But in recent interviews and public remarks, officials have said they don't think they need to change the asset-buying program now to deliver more economic stimulus.

Since the Fed's previous meeting in early November, several drugmakers have released very positive news about vaccines against Covid-19. While rising virus infections could lead to weaker-than-expected economic activity in the coming weeks, the vaccine progress has reduced the odds of much weaker growth in 2021.

"The risk characterization has improved," Chicago Fed President Charles Evans said on Friday.

The weaker pace of job growth in November, reported Friday by the Labor Department, underscores the headwinds facing the economy this winter as consumers could grow more cautious about spending amid record virus cases and hospitalizations.

But vaccine rollouts provide greater promise of a stronger rebound after that. On Nov. 20, Pfizer Inc. submitted its application to the Food and Drug Administration for vaccine authorization, which could be granted as soon as this month. A second vaccine from Moderna Inc. is also under review by teams at the FDA.

"As we see progress each and every week and month, that really sets the pace for a better recovery in 2021," said Mr. Evans. "We're still looking to see how things are going to work themselves out" before making decisions about whether to provide additional stimulus, he said.

Fed officials cut their short-term benchmark rate to near zero in March and spelled out in September how long rates would stay at that level. They said they wouldn't lift rates before the labor market is healed and until inflation hits 2% and is projected to run moderately above that level.

That leaves their monthly purchases of $120 billion in Treasurys and mortgage-backed securities as the main tool with which officials could provide more support. They discussed at the November meeting how they might change the program to deliver more stimulus if warranted.

Since June, the Fed's rate-setting committee has said those purchases would continue "over coming months." At the December meeting, officials could decide to replace that guidance with new language that links the time frame for the stimulus program to economic conditions.

They could link the guidance to their interest-rate plans, for example, by saying that the central bank won't reduce the pace of buying until the pandemic has passed or until officials are satisfied that they are on track to meet their inflation and employment goals. They could also clarify that they would reduce bond buying before they begin raising short-term rates.

Recent surveys of investors and economists show a range of opinions about how long they expect the Fed to keep buying assets at the current pace. More than half of large investment firms surveyed by the New York Fed in October expected the central bank not to slow the bond buying until 2022. A separate survey of the banks that serve as the Fed's counterparties on Wall Street has the purchases slowing next year.

In recent weeks, investors have focused their attention on a separate issue: whether the Fed might change the composition of securities to concentrate on lowering longer-term yields, as the central bank did during bond-buying programs last decade.

If more stimulus is warranted, several officials have said they would prefer to lengthen the maturity profile of their holdings before they increase the pace of those purchases. But few officials have argued that this step is needed right now.

"I'd probably be inclined as long as financial conditions are as accommodative as they are right now...to keep that tool in our pocket for a time where we believe it would be helpful," Dallas Fed President Robert Kaplan said in an interview Tuesday.

Officials could also debate whether to shift their purchases of Treasurys to longer-dated assets when they begin to reduce the quantity of purchases.

Mr. Evans said he thinks it would be better to revisit any refinements next spring. If growth slows in the coming months, it would be better for Congress and the White House to agree on new relief funding. "Fiscal policy holds the promise to do something more quickly," he said.

Fitful efforts to pass another aid package came back to life this week when top Democrats endorsed a $900 billion proposal with bipartisan support; that is down from earlier calls for spending of at least $2 trillion.

Fed policy in the past decade has been guided by the theory that holding long-term securities stimulates financial markets and the economy by holding down long-term interest rates. That is thought to drive investors into riskier assets like stocks and corporate bonds and encourage business investment and consumer spending. Holding short-term securities, this theory holds, provides little stimulus.

With long-term interest rates much lower today than they were during any of the prior bond-buying campaigns, there would be less room to deliver stimulus now by changing the profile of purchases.

Should long-term yields rise, officials said they will pay careful attention to the reasons behind any move. An upturn in yields for benign reasons -- such as growing confidence in the economic outlook, either because Congress approves new stimulus or vaccine deliveries ramp up -- wouldn't call for the same response as yields that spike due to market deterioration or a misunderstanding of the Fed's policy views.

"We're trying to reduce borrowing costs" with asset purchases, said Mr. Evans. "But when the economy is stronger and everybody is demanding more and it's easier to make good loans at slightly higher payoff rates, that's actually a good thing for the economy."

Fed officials are set to deliver updated economic projections at their coming meeting. In September, most officials projected interest rates would remain near zero at least through 2023 to meet the commitments in their new policy-setting framework, designed to encourage a modest overshoot of the 2% inflation target.

Any upgrade to the economic forecast in 2021, 2022 and 2023 due to vaccine breakthroughs could allow officials to underscore their commitment to the new framework by projecting interest rates would remain near zero despite the brightening economic outlook.

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

(END) Dow Jones Newswires

December 04, 2020 16:19 ET (21:19 GMT)

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