Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing on “The Quarterly CARES Act Report to Congress” on Capitol Hill in Washington, December 1, 2020.
Susan Walsh | Pool | Reuters
The Federal Reserve heads into its meeting next week in a familiar place, with a teetering economy that could be in further danger unless Congress approves more dollars to support those still getting slammed by the coronavirus pandemic.
Also familiar ground: The Fed has limited policy options to help boost activity and is left now with some language tinkering on what it would take to raise interest rates in the future, and what it can do to help things along through its asset purchase program.
Markets, then, will be left to watch for policy nuance and nudges rather than the kind of bold steps it has seen the central bank take previously.
On the menu will be expanding the $120 billion in bonds a month through quantitative easing, adjusting the maturity of those purchases, or providing “outcomes-based” guidelines it will need to see before tightening policy from its current historically loose level.
Interest rate cuts are not part of that policy buffet, as the Fed’s benchmark rate is already anchored near zero.
“They have to get incrementally more dovish next week,” said Brian Nick, chief investment strategist with Nuveen’s Global Investment Committee, using a term to describe looser policy. “I think they’re going to go with the maturity extension of the QE program, that’s the first step you would take. Increasing the size of QE might send a little more alarming signal than they would like to take at this moment.”
Going out on the duration curve would enhance the focus of the latest QE leg from its initial purpose of keeping markets functioning to lowering longer-term interest rates. From the Fed’s view, that decreases borrowing cost for consumers and spurs moves into risk assets, both of which are focused at broader economic growth rather than just keeping liquidity moving.
An outright expansion of borrowing, with the Fed’s asset holdings at nearly $7.3 trillion, might, as Nick indicated, signal an even more troubled economy, an alarm the Fed may not want to sound. Most of the Fed’s holdings are Treasurys and mortgage-backed securities that are the targets of the current purchases.
Fed officials will lose some of their other tools when special lending powers they were granted during the pandemic run out. That leaves them with limited options for what could be some difficult days ahead, particularly if no fiscal package from Congress is forthcoming.
“I’m not sure they’re ready to do something, to introduce some fresh monetary stimulus. I think they will hope that it puts more pressure on the fiscal side,” said Tom Graff, head of fixed income at Brown Advisory. “They’re really hoping that this spate of rough jobs numbers gets Congress in gear to help out and they don’t have to do anything more” at the Fed.
Go to the news source: Here’s everything the Federal Reserve could do at its policy meeting next week