Fed Stays in Holding Pattern With Rates and Asset Purchases Unchanged
People ride scooters past the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S. (Photographer: Erin Scott/Bloomberg)

Fed Stays in Holding Pattern With Rates and Asset Purchases Unchanged

Federal Reserve Chair Jerome Powell opened the door to a possible shift in the central bank’s bond purchases in coming months, saying that more fiscal and monetary support are needed as rising Covid-19 infections cloud the outlook for the economic recovery.

“At this meeting my colleagues and I discussed our asset purchases,” Powell told reporters Thursday after the Fed kept interest rates near zero and held bond purchases at a $120 billion monthly pace.

With the Fed’s overnight policy rate near zero, it has sought to support the economy during the pandemic by buying bonds. Those purchases help to lower longer term borrowing costs for businesses and households. Powell said that the central bank could shift the composition, duration, size or the life cycle of the program to provide more aid.

“We understand the ways in which we can adjust the parameters of it to deliver more accommodation if it turns out to be appropriate,” he said.

Fed Stays in Holding Pattern With Rates and Asset Purchases Unchanged

The Fed’s next meeting is Dec. 15-16, when it could possibly make a change if the economic picture deteriorates.

Powell spoke about the outlook for the economy against the backdrop of the U.S. election, whose results remain uncertain. He deflected questions on the outcome, saying: “It is a good time to step back and let the institutions of democracy do their jobs.”

While Democrat Joe Biden has a clearer path to the presidency than Donald Trump, Republicans look on track to retain control of the Senate. That could dim the prospect for another round of massive fiscal aid -- leaving the Fed in the spotlight.

“The Fed is being forced once again to shoulder more than its fair share of the burden of stimulus,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Powell was optimistic that fiscal stimulus was possible. It seems clear it will now be less and occur later than needed.”

What Bloomberg Economics Says

“The Fed may decide to shift asset purchases toward longer maturities in order to constrain any rise in long-term bond yields. The central bank will ramp up the discussion of its balance sheet policy framework at the coming meetings.”

-- Yelena Shulyatyeva, Andrew Husby and Eliza Winger, economists

For the full report, click here

Divided government in Washington would reduce the chances for a big fiscal stimulus package from Congress in the new year, even as the Covid-19 pandemic continues to threaten the economy.

Powell sounded a bit hopeful on the prospects for more aid from lawmakers, noting “plenty of people on Capitol Hill” see the need for more action, while cautioning that the recovery will be stronger with more fiscal support.

He was also wary on the outlook: “The recent rise in new Covid-19 cases, both here in the United States and abroad, is particularly concerning.”

In a statement following its two-day meeting, the Federal Open Market Committee largely repeated language on the economy they’ve employed since July, noting that “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.”

The vote to keep rates and asset purchases unchanged was unanimous. Minneapolis Fed President Neel Kashkari, a voter this year, did not attend the meeting following the birth of a child. San Francisco Fed President Mary Daly voted as an alternate.

Balance Sheet

The Fed has held its benchmark policy rate near zero since March and signaled it will stay that way at least through 2023. That leaves its balance sheet the most likely tool to turn to for more monetary support.

Powell said the bond buying program was “delivering about the right amount of accommodation in support for the markets,” To some, including Scott Brown, chief economist at Raymond James Financial Inc., that didn’t signal the FOMC was on the verge of making a change in December.

“I think they’re happy where they are,” he said. “If job numbers, say, started to turn south, maybe that would prompt some action, but it would take something significant for that to change.”​

Fed Stays in Holding Pattern With Rates and Asset Purchases Unchanged

​The economic recovery remains uneven against a backdrop of surging Covid-19 cases, with more than 12 million Americans still out of work. October’s employment report, due Friday, is expected to show the jobless rate continuing to edge down to 7.6%, while the pace of new hiring probably cooled for the fourth consecutive month.

Still, the fact that Powell was prepared to share details of the FOMC’s internal debate, and discuss the various options open to it on asset purchases was eye-catching.

“The discussion seems further along than I thought it would be at this stage, and what was most surprising is that he would disclose that,” said Derek Tang, an economist at LH Meyer. “They are thinking about these issues.”

©2020 Bloomberg L.P.

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