Federal Reserve Chair Jerome Powell and his colleagues, facing an economy slowing as the Covid-19 outbreak worsens, are considering whether to alter their asset purchase program to provide more support for growth.
The Federal Open Market Committee is all but certain to keep its benchmark overnight interest rate in a target range of 0% to 0.25%, where it’s been since March 15 to help soften the pandemic’s blow. The panel will release a statement and economic forecasts at 2 p.m. Wednesday. Powell will hold a press briefing 30 minutes later.
Economists say the Fed may deliver fresh guidance on its asset purchases, now $120 billion a month, tying how long the buying will continue to substantial progress in meeting its goals of full employment and 2% inflation. That would be a stronger commitment than the existing pledge to maintain purchases “over coming months.”
The market has been primed for a change since the minutes of the November FOMC meeting showed officials discussed enhancing their description of the bond-buying program ‘’fairly soon.”
“The biggest disappointment would be a failure to deliver on some kind of guidance on asset purchases,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “The Fed’s most powerful tool is the perception that they are there.”
Asset Purchases
A slight majority of economists surveyed by Bloomberg expect new guidance on purchases this meeting, though other changes including increasing the scale of the buying are less likely. While nearly two-thirds of economists say the FOMC will extend the average maturity of bond purchases before the end of 2021, just 23% of those forecasting such a step saw it coming this week.
“If more stimulus is needed, they will have a better view in January or February,” said Bob Eisenbeis, vice chairman of Cumberland Advisors and a former Atlanta Fed official. With rates so low, “I am doubtful they can successfully communicate why tweaking the maturities will accomplish some employment or inflation objective.”
There may be dissenting votes over the issue of asset purchases, Deutsche Bank economists led by Matthew Luzzetti wrote in a note to clients. Dallas Fed’s Robert Kaplan and Minneapolis’s Neel Kashkari dissented in September over updated rate guidance, with Kaplan wanting more flexibility and Kashkari arguing it didn’t go far enough.
Market Reaction
The decision on asset purchases is likely to affect trading in Treasury securities. A failure to extend the maturity of Treasury buying or increase purchases could help to lift the 10-year Treasury yield to 1% or higher.
Since late March the 10-year yield has moved between 0.5% -- a trough reached in August -- and just under 1%. It nearly broke this upper barrier in the first few days of December, after a tepid employment report lifted hopes for more government spending as virus cases mounted.