By Nick Timiraos
Federal Reserve officials are likely to unveil this month new
guidance about how long they expect to continue their current
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
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
"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
"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
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
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
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
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 email@example.com
(END) Dow Jones Newswires
December 04, 2020 16:19 ET (21:19 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.