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Fed in Holding Pattern While Washington Battles Over Stimulus

Fed in Holding Pattern While Washington Battles Over Stimulus

U.S. central bankers are reluctant to fire the next bullet in their policy arsenal, despite uncertain progress in Washington on more fiscal stimulus that they say is vital to support the economic recovery.

Around 20 speeches and interviews with Fed officials last week, plus minutes of their meeting in mid-September, paint a picture of policy makers ready to consider doing more at some stage -- but in wait-and-see mode while Republicans and Democrats joust ahead of the Nov. 3 vote.

Prospects for another round of fiscal spending remain highly unsettled after President Donald Trump pulled out of talks on Oct. 6, hours after Chair Jerome Powell urged lawmakers err on the side of doing more rather than less to help the economy heal from Covid-19.

The White House subsequently proposed a new $1.8 trillion stimulus package, with Trump himself saying he wanted to go even further, and negotiations with Democrats are expected to continue this week.

Fed in Holding Pattern While Washington Battles Over Stimulus

While the economy is rebounding faster than expected, officials point out this underlines the success of $3 trillion in fiscal support already agreed which is at risk if that support isn’t extended.

“The data look fine so there is no immediate pressure for the Fed to act,” said Ethan Harris, Bank of America Corp.’s head of global economic research. “Like everyone else, the Fed is a spectator waiting to see if a fiscal package is delivered. On the margin, the Fed prefers not to make a major announcement right before or after an election.”

The Fed’s next meeting starts the day after the election and policy makers gather again Dec. 15-16. A record of their meeting last month showed officials anxious about the recovery if fiscal aid is not renewed.

Bond Buying

Some officials pushed for a debate about the future of the Fed’s bond-buying program at their last meeting, potentially heralding a shift in what they buy, or an increase in the already hefty $120 billion monthly purchases that recall the Fed’s quantitative easing during the Great Recession.

But there was not much enthusiasm for doing so in the near term, even among usually reliable doves like Minneapolis Fed chief Neel Kashkari and Chicago’s Charlie Evans.

“Expanding QE is not substitute for extended unemployment benefits. If you can’t pay your rent, what is the Fed doing more QE going to do for you,” Kashkari said Oct. 7. “We cannot put money in pockets of people who’ve lost their jobs, only Congress can do that.”

Evans told reporters that he might be open being more explicit about the future of the bond buying program, but would prefer to wait until spring when he’ll have a better sense of the outlook.

Biden Bounce

The next administration will take office in late January and Democratic challenger Joe Biden is promising more than $3 trillion in extra spending over a four-year term if he beats Trump next month.

If Fed officials do decide to do more, bond purchases are seen as the most likely tool. They’ve already cut their benchmark interest rate to nearly zero and repeatedly said they don’t want to push it into negative territory, as some major central banks have done.

Officials could increase the amount of Treasuries and mortgage-backed securities they buy, in an attempt to lower long-term borrowing costs further. The Fed is currently purchasing a combined $120 billion in securities each month.

They might also shift some current bond purchases away from securities maturing in less than three years and toward those due over longer periods. That could help lower longer-term rates without adding to overall purchase levels.

Rates Already Low

But the silence of the doves tells Fed watchers that the debate over whether to do more on bond buying is premature. There’s also the argument that long-term borrowing costs are already low, with 10-year yields around 0.75%.

“Of all the issues facing the US. economy, one of the problems we’re having is not that rates are too high,” Dallas Fed President Robert Kaplan said Thursday in an interview on Bloomberg Television. “We’re already buying a significant amount of bonds as it is and I’d be skeptical about the benefits of doing more.”

Fed in Holding Pattern While Washington Battles Over Stimulus

His Boston colleague Eric Rosengren made a similar point in a separate Bloomberg News interview but said it was still worth considering.

Few Options

“The entire committee is clearly hoping that fiscal policy will do more of the lifting,” said Jonathan Wright, a professor at Johns Hopkins University and a former Fed economist. “The Fed wants this because even though they are not entirely out of ammunition, they are running low on policy options that are likely to be effective.”

While the economy is doing better than expected at the outset of the pandemic, it is still in a deep hole. More than 12 million people are unemployed. And while action by Congress has helped households and small businesses stay afloat so far, that support has not yet been renewed.

“We have the crucial Christmas-Thanksgiving shopping season ahead of us, so the risk of a consumption slowdown is real,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management in Geneva, who expects the central bank to increase bond buying in December. “What the Fed wants to avoid at all costs is another recession.”

©2020 Bloomberg L.P.