By Yasin Ebrahim
Investing.com – Federal Reserve policymakers mulled a range of options to tweak their bond-buying program, and agreed that while the current pace of purchases was appropriate and an update on guidance was needed “fairly soon,” according to the minutes of the central bank’s last policy meeting released Wednesday.
At the conclusion of its previous meeting on Nov. 5, the Federal Open Market Committee kept its benchmark rate in a range of 0% to 0.25% and pledged to maintain bond purchases at a $120 billion monthly pace.
Fed members debated a range of options on bond purchases to support the recovery, including increasing the pace of purchases or shifting focus to longer duration bonds.
“Participants generally saw the current pace and composition as effective … and noted the committee “could provide more accommodation, if appropriate, by increasing the pace of purchases or by shifting its Treasury purchases to those with a longer maturity without increasing the size of its purchases,” the minutes showed.
The Fed’s bond purchases so far, have lowered longer term borrowing costs for businesses and households, and continue to help steer the economy through the pandemic.
In recent weeks, the sense of urgency to widen the liquidity spigot has been strengthened after Treasury Secretary Steven Mnuchin said he would allow the central bank’s emergency lending programs – rolled out at the height of pandemic in March – to expire at year-end.
“The unilateral decision of Treasury Secretary Mnuchin to allow a slew of Fed emergency lending programs to close to new borrowers on December 31, despite Fed objections, increases the chance that the FOMC will step-up its asset purchases,” Pantheon Macroeconomics said in a note.
The decision from Mnuchin was widely criticized as it comes as a time when another wave of coronavirus cases across the nation has seen parts of the U.S. impose lockdown measures that will slow the recovery.
Most members, however, appear keen to avoid the ‘taper tantrum’ seen in previous years – when expectations for the central bank to trim its bond purchases triggered a bout volatility in markets – and prefer the Fed to beef up its guidance on bond purchases.
“Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon,” the minutes said. “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 lower interest rate environment has allowed the economy to pick up the economic slack, which in turn is expected to “cause inflation to increase gradually,” with the fed predicting a moderate 2% overshoot for some time in the years beyond 2023.
While Fed members agreed the future path of fiscal policy support remained uncertain, hopes for a helping fiscal hand were given a boost on reports that President-elect Joe Biden will nominate former Fed Chair Janet Yellen as Treasury Secretary.
During her tenure as Fed Chair, Yellen was viewed as pro-stimulus, and if nominated is widely expected to support fiscal-boosting measures.
Treasury secretaries, however, don’t have direct control over fiscal policy. The former Fed Chair will likely have to contend with a Republican-held Senate that could keep fiscal policy options on a short leash somewhat.
Fed Mulls Tweak of Asset Purchases to Keep Recovery Intact, Minutes Show
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