The Federal Reserve has bought trillions of dollars in Treasuries just to fix the bond market. It may need to buy a lot more to help repair the economy.

A surge of new coronavirus cases is clouding the economic outlook in the U.S., and that’s likely to translate into pressure for more action from the Fed -– maybe as soon as this month’s meeting. Fed Governor Lael Brainard hinted as much on Tuesday, saying the central bank should pivot its policies toward providing longer-run accommodation.

Wall Street strategists and Fed officials say the focus will now be on sustaining a recovery and potentially keeping a lid on long-term yields as the government pumps in even more fiscal stimulus. The Fed has also been compressing yields with emergency lending facilities supporting everything from muncipal to corporate debt. But those programs are temporary.

“There is a transition that they have to negotiate over the next few meetings from purchasing assets for the avowed intention of market functioning to more traditional large-scale asset purchases” to reduce term premiums and so lower long-term borrowing costs, said William English, former director of the Fed Board’s Division of Monetary Affairs, and now a professor at the Yale School of Management.

In a sign that traders are wary that the Fed could ramp up quantitative easing and buy more long-term debt, the Treasuries yield curve has been flattening in recent weeks. The gap between 5- and 30-year yields has fallen to just above 100 basis points, from as high as 129 last month, the peak for 2020.

July Question
The question Fed officials face heading into their July 28-29 meeting is whether they make that shift in combination with changes to guidance on short-term rates. There’s also the issue of whether that would require a conclusion to their strategy review, which has been running for more than a year.

Brainard and other officials suggest the Fed needs to achieve sustainable 2% inflation, a goal that likely means overshooting that target for some time. She along with Chair Jerome Powell also have indicated the Fed is taking a more inclusive approach to its full-employment mandate. The central bank needs to agree on all of that and roll it into its policy guidance. Minutes from its June gathering said officials want to complete the review “in the near term.”

“Our suspicion is that they don’t feel bound by the time-line of the framework review or the forward guidance,” said Derek Tang, an economist at policy research firm L.H. Meyer in Washington. “They could easily say in July that they are going to announce a new maturity composition of Treasury purchases.”

The Fed already owns $4.2 trillion of U.S. government debt, roughly 22% of the total outstanding. Since slashing rates in March to near zero, it’s purchased about $1.7 trillion in Treasuries with the aim of improving market functioning. It’s still buying about $80 billion a month, one reason 10-year yields, a benchmark for global borrowing, are only about 0.60% and have barely budged since April even as stocks have surged.

Although market functioning has improved markedly since the period of extreme stress in March, Fed officials say uncertainty about the course of the pandemic makes it prudent to maintain the purchases to protect against further shocks.

First « 1 2 » Next