Fed Mulls Shift in Bond Buying Program: FOMC Decision-Day Guide

(Bloomberg) -- Federal Reserve Chair Jerome Powell and his colleagues, facing an economy slowing as the Covid-19 outbreak worsens, are considering whether to alter their asset purchase program to provide more support for growth.

The Federal Open Market Committee is all but certain to keep its benchmark overnight interest rate in a target range of 0% to 0.25%, where it’s been since March 15 to help soften the pandemic’s blow. The panel will release a statement and economic forecasts at 2 p.m. Wednesday. Powell will hold a press briefing 30 minutes later.

Economists say the Fed may deliver fresh guidance on its asset purchases, now $120 billion a month, tying how long the buying will continue to substantial progress in meeting its goals of full employment and 2% inflation. That would be a stronger commitment than the existing pledge to maintain purchases “over coming months.”

The market has been primed for a change since the minutes of the November FOMC meeting showed officials discussed enhancing their description of the bond-buying program ‘’fairly soon.”

“The biggest disappointment would be a failure to deliver on some kind of guidance on asset purchases,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “The Fed’s most powerful tool is the perception that they are there.”

Asset Purchases

A slight majority of economists surveyed by Bloomberg expect new guidance on purchases this meeting, though other changes including increasing the scale of the buying are less likely. While nearly two-thirds of economists say the FOMC will extend the average maturity of bond purchases before the end of 2021, just 23% of those forecasting such a step saw it coming this week.

“If more stimulus is needed, they will have a better view in January or February,” said Bob Eisenbeis, vice chairman of Cumberland Advisors and a former Atlanta Fed official. With rates so low, “I am doubtful they can successfully communicate why tweaking the maturities will accomplish some employment or inflation objective.”

There may be dissenting votes over the issue of asset purchases, Deutsche Bank economists led by Matthew Luzzetti wrote in a note to clients. Dallas Fed’s Robert Kaplan and Minneapolis’s Neel Kashkari dissented in September over updated rate guidance, with Kaplan wanting more flexibility and Kashkari arguing it didn’t go far enough.

Market Reaction

The decision on asset purchases is likely to affect trading in Treasury securities. A failure to extend the maturity of Treasury buying or increase purchases could help to lift the 10-year Treasury yield to 1% or higher.

Since late March the 10-year yield has moved between 0.5% -- a trough reached in August -- and just under 1%. It nearly broke this upper barrier in the first few days of December, after a tepid employment report lifted hopes for more government spending as virus cases mounted.

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Forecasts

Officials are expected to project rates staying near zero though 2023, reinforcing the message delivered by Powell that they will delay tightening policy to achieve inflation that averages 2% over time. In September, four of 17 FOMC participants saw a hike by 2023. Any increase would suggest a growing internal debate about an earlier rate liftoff.

The central bank may upgrade its 2020 unemployment and growth forecasts, reflecting a faster-than-expected recovery from the pandemic. With the first vaccines being distributed in the U.S. this week, the committee could tweak its 2021 or 2022 forecasts, though most economists say the committee will look for a slow return to normal, so expectations could be muted.

“Growth forecasts for 2021 and 2022 may be revised slightly higher fueled by optimism for a near-term vaccine,” said Lindsey Piegza, chief economist with Stifel Nicolaus in Chicago. “Given the extended timeline for a full recovery back to pre-pandemic levels both at home and globally, the committee’s inflation forecast is likely to remain subdued for some time.”

While St. Louis Fed director of research Christopher Waller was confirmed Dec. 3 by the U.S. Senate to take one of the two vacant governor seats on the Fed Board, he had not been sworn into office by the time the meeting began Tuesday. As a result, the number of forecasts submitted by Fed officials this month will remain at 17.

FOMC Statement

Recent economic data have shown slowing progress in the labor market and a surge in virus cases, hospitalizations and deaths, prompting some cities and states to increase curbs on economic activity. That will probably be reflected in the tone of the statement, even as the medium-term outlook has improved because of the rollout of vaccines.

“I would expect that the statement will acknowledge the worsening pandemic and slower progress in the labor market,” said Jonathan Wright, an economics professor at Johns Hopkins University. “There is a danger that progress in the labor market could stall completely. That is not yet there in the data, but slow progress is.”

Press Conference

Powell’s press conference will hash over the decision on asset purchases, as well as what would prompt future changes in bond buying. The chair is also likely to repeat his call for additional fiscal support, with Congress continuing to discuss aid before leaving for its Christmas break.

The Fed’s view on the need to re-install some of its emergency lending programs is another likely topic. Several, including its Main Street facility aimed at small and medium-sized borrowers, will wind down Dec. 31 following a decision by outgoing Treasury Secretary Steven Mnuchin that they should not be extended.

Seeking their resuscitation could be an early decision for Janet Yellen, Powell’s predecessor as Fed chair whom President-elect Joe Biden has tapped as Treasury secretary.

IOER

Downward pressure on short-term rates due to supply-demand imbalances could encourage officials to make another technical adjustment in the interest rate the Fed pays on excess reserves, which is currently 0.10%. The rate could be increased to keep money-market rates further away from zero, Bank of America Corp. strategists said.

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