The Marriner S. Eccles Federal Reserve building in Washington, D.C.
Federal Reserve officials discussed at their Nov. 4-5 meeting providing more guidance on their bond-buying strategy “fairly soon,” though they didn’t see a need for immediate adjustments.
Events since the gathering have continued to keep the case for action in the spotlight, even if officials have declined to clearly signal it is in the cards next month. The economy is enduring surging Covid-19 infection rates and the Trump administration last week declined to extend several Fed emergency lending facilities that the central bank publicly lobbied to keep on the books.
“Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon,” according to meeting minutes published Wednesday by the Fed.
In addition, “most participants judged that the guidance for asset purchases should imply that increases in the Committee’s securities holdings would taper and cease sometime before the Committee would begin to raise the target range for the federal funds rate,” the minutes showed. The Fed’s next scheduled meeting is Dec. 15-16.
As well as the resurgence of the pandemic, reduced odds of another large fiscal relief package have weighed on the economic outlook and raised expectations that the Fed will take further action to support the economy, as has the whittling down of the Fed’s emergency lending firepower.
“Moves by Treasury to limit their lending powers at year end are a particular concern. Treasury could be pulling support when the economy needs it most and the Fed will have to fill the void,” said Diane Swonk, chief economist at Grant Thornton. “They have to be concerned about the aftershocks of Covid on bankruptcies, defaults and overall financial market stability.”
Treasury Secretary Steven Mnuchin on Nov. 19 announced he would allow five of the central bank’s emergency lending facilities to expire at the end of the year and asked that funds backing the programs be returned to the Treasury. The Fed pushed back in a rare public disagreement, issuing a statement that it preferred the programs remain in place because of the backstop role they played before Chair Jerome Powell relented the following day, agreeing to return the money. Similar arguments surfaced in the minutes.
‘Important Roles’
Several officials at the meeting “emphasized the important roles” the lending programs played “in restoring financial market confidence and supporting financial stability” and “noted that these facilities were still serving as an important backstop in financial markets,” according to the minutes.
Treasuries gained ground following the release of the minutes, with longer-dated securities outperforming. The 5-to-30-year yield curve flattened, but remained steeper on the day.
The U.S. central bank cut its benchmark interest rate to nearly zero in March at the onset of the coronavirus pandemic and ramped up crisis-era bond-buying programs to pump liquidity into the financial system and keep a lid on longer-term interest rates.
Officials have signaled they will probably hold rates near zero through the end of 2023.
The Fed is currently buying U.S. Treasury and mortgage-backed securities at a combined pace of about $120 billion per month, with purchases spread out evenly across maturities.
But the record of the Nov. 4-5 meeting didn’t give any indications that officials would necessarily seek to modify the parameters of the bond-buying program at their December meeting.
Not Immediate
“While participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary, they recognized that circumstances could shift to warrant such adjustments,” the minutes said. “Accordingly, participants saw the ongoing careful consideration of potential next steps for enhancing the Committee’s guidance for its asset purchases as appropriate.”
Data published Wednesday by the Labor Department showed a growing number of Americans filing for unemployment insurance over the last two weeks while a separate Commerce Department report revealed a drop in household income last month, underscoring the tenuous position of the economy ahead of the winter season.
“At least as of three weeks ago, the committee was more focused on nailing down forward guidance on asset purchases and there didn’t seem to be urgency to provide more accommodation,” Brett Ryan, a senior U.S. economist at Deutsche Bank Securities, said.
But that was “before we had the news from the Treasury,” Ryan said. “If financial conditions began to deteriorate, that would be a trigger“ for the Fed to do more, he said.
— With assistance by Benjamin Purvis, and Steve Matthews
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