The Federal Reserve is poised to issue new guidance extending its emergency bond-buying programme, as it grapples with the need for another monetary boost to buttress the US economic recovery.
At this week’s meeting, US central bankers are widely expected to approve language specifying that the $120bn per month in debt purchases launched at the start of the pandemic will continue until the recovery meets certain conditions, according to senior economists and Fed watchers.
At the moment, the Fed says its bond purchases will continue at their “current pace” only over the “coming months” — a far more limited timeframe.
If agreed, the change would make it harder for the central bank to make an early move to wind down its bond purchases, cementing its easy monetary policy for years to come. The shift would complement its pledge to keep interest rates close to zero until inflation is on track to exceed 2 per cent and the economy reaches full employment.
In addition, the Federal Open Market Committee will be forced to consider whether bolder monetary easing through the asset-purchase programme is warranted.
With Covid-19 cases rising, lay-offs rising and confusion on Capitol Hill about the prospects for fiscal stimulus, some economists say the Fed may have to act now to meet its pledge to do more to support the recovery if needed. Last week, the European Central Bank increased the size of its bond purchases and extended their duration after the eurozone economy was hit with more infections and restrictions.
“We have a worse virus, more shutdowns and more evidence it’s spilling over into hiring. Meanwhile, fiscal policy is way up in the air — we have no idea what we’re going to get,” said Julia Coronado, an economist at Macropolicy Perspectives. “I just don’t think it makes sense to come to the table with nothing in your hands.”
If the Fed decides to take more aggressive monetary action, the most likely possibility would be to shift the maturity of its debt purchases towards longer-dated bonds. Purchases so far have so far been slightly weighted towards the shorter end.
A far less likely option would be an increase in the overall value of the debt purchases, which currently amount to $80bn of Treasury debt and $40bn of agency mortgage-backed securities per month.
Fed officials have been cautious about taking such extra steps. Last month, they said the asset purchase scheme as currently designed was effective and they would only move to boost it if the economic situation changed.
Roberto Perli, an economist at Cornerstone Macro, said there were a “number of reasons” for the Fed to take stronger easing action, including the need to offset the growing pandemic risks and its own desire to stoke higher inflation. But he was not…
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