Fed to Debate Bond-Buying Program in Possible Step Toward Action

(Bloomberg) -- U.S. central bankers look poised to discuss the future of the Federal Reserve’s asset-purchase program when they meet again in November, potentially heralding a shift in what they buy, or an increase in how much they purchase.

Minutes of the Federal Open Market Committee’s Sept. 15-16 meeting released Wednesday showed that “some participants also noted that in future meetings it would be appropriate to further assess and communicate how the committee’s asset-purchase program could best support” the Fed’s dual-mandate objectives.

The readiness of some officials to examine the bond-buying program signals they’d be open to altering or increasing the purchases -- perhaps before the end of the year -- as a way to further bolster the economy’s slowing recovery from the Covid-19 pandemic. Officials would be unlikely to consider cutting purchases. They next meet Nov. 4-5, a day after the U.S. presidential election.

Zero Rates

Policy makers agreed at the September meeting to hold rates near zero until the labor market reached maximum employment, and inflation reached 2% -- and was on track to moderately exceed that goal for some time. Forecasts also released on Sept. 16 showed officials didn’t expect the economy to reach those targets until 2023 or 2024.

U.S. central bankers, gathering virtually as a precaution against Covid-19, agreed to keep purchasing Treasury and mortgage-backed bonds at a combined pace of about $120 billion a month.

At upcoming meetings, officials could seek to provide more monetary policy support by increasing the amounts of Treasuries and mortgage-backed securities they buy in an attempt to lower borrowing costs for households and businesses.

Lengthen Duration

Having already emphasized that overnight rates are likely to be pinned to zero for years, policy makers 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.

Officials repeated their mantra that the path of the U.S. economy would depend on the path of the Covid-19 virus. However, the minutes suggest many officials will downgrade their already lackluster forecasts if no new agreement emerges in Washington over fiscal aid.

“Many participants noted that their economic outlook assumed additional fiscal support and that if future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated,” the minutes said.

Financial Stablity

Policy makers showed elevated concerns about financial stability, as well, if the recession becomes extended further than previously expected.

“While the risk of another broad economic shutdown was seen as having receded, participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery,” the record said. “Such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses.”

The section detailing the debate between policy makers over the interest-rate guidance eventually incorporated into the Sept. 16 policy statement also revealed more opposition to the new language than previously disclosed.

Two Dissents

Two FOMC voters, Dallas Fed President Robert Kaplan and Minneapolis’ Neel Kashkari, dissented over the statement. The minutes, however showed “several” officials objected to the change.

“Several participants noted that while they agreed it was appropriate to incorporate key elements of the consensus statement into the post-meeting statement, they preferred to retain forward guidance similar to that provided in recent FOMC statements,” the minutes said.

These participants argued that “with longer-term interest rates already very low, there did not appear to be a need for enhanced forward guidance at this juncture or much scope for forward guidance to put additional downward pressure on yields.”

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