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
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
"Many participants judged that the committee might want to
enhance its guidance for asset purchases fairly soon," the minutes
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
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
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
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
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
"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
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
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
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 email@example.com
(END) Dow Jones Newswires
November 25, 2020 17:41 ET (22:41 GMT)
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