By Nick Timiraos 

Federal Reserve officials this month discussed plans to provide more information about how long they will keep purchasing Treasury and mortgage-backed securities by linking the time frame for the stimulus program to economic conditions.

Minutes of the Nov 4-5 meeting released Wednesday showed officials were prepared to roll out the revised guidance as soon as their next meeting, set for Dec. 15-16. They also discussed ways that the purchases could be altered to provide more stimulus to the economy, if needed. But they didn't indicate any imminent changes in that direction.

Whether the Fed takes any of those additional steps next month could depend on how the economy and financial markets weather rising virus infections and the removal, at the end of the year, of emergency lending programs established by the Fed and the Treasury Department.

Since June, the Fed has been buying $80 billion a month in Treasurys and $40 billion in mortgage securities, net of redemptions, and its rate-setting committee said in its policy statement that those purchases would continue "over coming months."

"Many participants judged that the committee might want to enhance its guidance for asset purchases fairly soon," the minutes said.

In September, the Fed provided guidance about its interest-rate plans by laying out three economic conditions that would need to be met before it raised rates from near zero. The Fed said it would hold rates at that level until the labor market is healed, inflation hits 2% and inflation is projected to run moderately above 2%.

Similar guidance for the asset purchases could say, for example, that the central bank won't reduce the pace until the pandemic has passed, or until officials are satisfied that they are on track to meet those other conditions. Most officials thought the guidance should imply that they would slow the pace of bond purchases before beginning to raise short-term interest rates, the minutes said.

At their meeting this month, officials said it would be important for the new guidance around asset purchases to be consistent with the September guidance around interest rates "so that the use of these tools would be well coordinated," the minutes said. A few officials said they were hesitant to make the change soon because the economic outlook was so uncertain.

Fed officials are navigating an outlook clouded by the risk that the economic recovery slows in the winter months amid rising coronavirus cases. At the same time, positive developments about vaccine trials raises the prospect of a stronger rebound later in 2021.

Central banks took aggressive actions earlier this year after the virus upended daily life and forced curbs on economic activity that had no precedent in peacetime. The Fed cut its benchmark rate to near zero in March and bought tens of billions of Treasurys and mortgage securities a day to unclog dysfunctional markets. It gradually slowed the pace of the purchases until June, when it fixed the monthly volumes at their current level.

The Fed also unveiled an array of emergency lending programs in the spring in partnership with the Treasury Department, which provided $195 billion in money set aside by Congress to backstop loan losses.

Last week, Treasury Secretary Steven Mnuchin said the programs were no longer needed, that the money would be better spent on other aid that Congress hasn't agreed to approve and that he lacked the authority to extend the programs beyond December -- provoking an unusual split with the Fed, which had pressed for an extension.

The Fed wanted to maintain the lending programs as a backstop in the face of threats posed by the coronavirus pandemic. "A few participants noted that it was important to extend them beyond year-end," the minutes said.

Officials were briefed by staff economists about ways to provide more support for the economy by adjusting the asset purchases. One possibility would be to shift the composition of Treasury purchases toward longer-dated securities, as the Fed did during its 2012-14 bond-buying program. A second option would call for increasing the quantity of monthly purchases and a third would conduct purchases of the same pace and composition over a longer time horizon.

Officials discussed a fourth option in which the Fed would increase the share of long-term holdings while decreasing the overall pace of purchases, but they said such a change would be tricky to communicate because it could feed the false impression that the Fed was choosing to reduce the amount of support provided to the economy.

The minutes didn't indicate a clear consensus for any particular change, but they said several officials saw limits to the potency of their asset purchases given the low level of long-term Treasury yields.

"Going forward, as we watch how the economy is evolving, how the outlook is evolving, we can think about any adjustments we want to make on those purchases," New York Fed President John Williams said in an interview Tuesday. "I think they're serving their purposes really well right now."

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.

The idea was at the core of former Chairman Ben Bernanke's strategy to move the Fed's holdings heavily into long-term Treasury bonds after the 2008 financial crisis. Fed estimates suggest the strategy lowered long-term interest rates by a full percentage point, making it less costly for millions of homeowners, car buyers, corporations and governments to borrow.

"We may reach a view at some point that we need to do more," said Fed Chairman Jerome Powell at a Nov. 5 news conference. But he indicated comfort for now with the current program, which he described repeatedly as large.

Fed officials saw signs of better-than-expected economic improvement as households had built up a larger pool of savings during the pandemic, which could provide more momentum to consumer spending. Most officials saw the risk that insufficient government spending to cushion hard-hit households, businesses, cities and states would lead to a pace of weaker growth, the minutes said.

In their economic briefing prepared for the meeting, Fed staff removed from their outlook the assumption of additional spending from Congress and the White House given the lack of progress in reaching a new agreement.

Although the lack of new spending would cause "significant hardships for a number of households," the economists judged that the savings cushion accumulated by other households this year would be enough to maintain overall spending over the next few months.

While reduced spending would lead to less demand over the medium-term, economists projected that state and local government funding woes would be less of a drag than previously anticipated due to new data on tax receipts.

As a result, the staff forecast expected the unemployment rate to continue to decline and inflation to gradually rise, moderately overshooting the Fed's 2% target for "some time" after 2023, assuming that monetary policy provides continued support to the economy.

A separate briefing on financial markets warned that vulnerabilities associated with household and business borrowing were "notable," and some Fed officials said their business contacts reported that many households and businesses were in a weaker position to weather additional economic shocks than they had at the beginning of the pandemic in March.

Write to Nick Timiraos at


(END) Dow Jones Newswires

November 25, 2020 17:41 ET (22:41 GMT)

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