Fed Watch: Policymaker Action Still Uncertain, Bond Purchase Update Possible

Investors were focused on what policymakers were thinking about the Federal Reserve’s asset purchases when the minutes of the monetary policy meeting in early November were published last week after the normal delay between the event and the release.

But what will happen at the December 15-16 Fed meeting is still anybody’s guess. The policymakers discussed the bond purchases at some length, but Treasury Secretary Steven Mnuchin’s surprise announcement two weeks after the November 4-5 meeting that he would let several of the Fed’s emergency lending facilities expire at the end of the year may have influenced their thinking.

Pessimism On Economy; Fiscal Policy Still Most Powerful Tool

But maybe not. Most of the facilities being phased out were hardly used, and Mnuchin told the Fed to return the $455 billion of unused funds for backstopping the programs. Treasury was also quick to clarify that any revival of the funds by, say, a new Treasury secretary would require an act of Congress.

At their meeting, the members of the Federal Open Market Committee were pretty much in agreement that they should clarify their guidance on asset purchases and link the timing to economic targets.

“Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon,” the minutes said.

“Most participants favored moving to qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions.”

In early November, “participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary,” so now the question is whether the withdrawal of the loan facilities and deterioration in economic conditions will change their minds.

Everyone expects former Fed chair Janet Yellen to smooth relations with the Fed if she is confirmed as Treasury secretary, but she may not be in a hurry to restore the lending facilities, especially if the economy is growing and COVID-19 vaccines become available.

The Fed could move ahead with its revised guidance on asset purchases but punt on any changes in quantity or composition pending a clearer picture of the economy.

At the November FOMC meeting, policymakers unanimously approved the recommendation to publish a fuller set of economic projections at the time of the meeting in order to provide more context for policy actions, and agreed to start in December. Presumably, these details will help investors understand any action or lack of action.

New York Fed chief John Williams, the only regional bank head who is a permanent voting member of the FOMC by virtue of the bank’s role in executing monetary policy, said the asset purchases are working “really well” right now, putting a damper on those hoping for an increase from the current levels of $80 billion in Treasuries and $40 billion in mortgage bonds each month.

Williams was also fairly sanguine that absent a tightening of financial conditions the economy could get along without restoring the lending facilities shut down by Mnuchin. He did, however, urge Congress to provide a second package of fiscal stimulus. “Fiscal policy is really the most powerful tool right now,” he said in an interview with The Wall Street Journal.

The head of the markets desk at the New York Fed, Daleep Singh, warned at a virtual event of the Institute of International Finance that the economy still faces “big challenges.” With or without the Fed lending facilities, there is still a “a big hole” in determining the next steps, he said.

Minneapolis Fed President Neel Kashkari echoed these concerns about a “rocky” period ahead, and urged either the outgoing or incoming administrations to work with Congress to get more relief for the jobless and businesses.

Meanwhile, policymakers at the European Central Bank were also pessimistic about the immediate economic prospects, according to the minutes of the governing council meeting in late October that were published last week.

“Members considered the risks surrounding the growth outlook to be clearly tilted to the downside,” the minutes said, reflecting the potential impact of a resurgence in COVID-19 infections and renewed restrictions on activity.

Expectations of an increase in the ECB’s bond-buying program from the current €1.35 trillion when the council meets in December, drove down the yields on peripheral government bonds, with the yield on Portugal’s 10-year bond dipping briefly into negative territory.