MNI EXCLUSIVE: Fed May Boost QE In Months If Fiscal Talks Fail

The Federal Reserve may step up the pace of its bond buys early next year if fiscal talks in Congress fail and economic growth slows further in the difficult months before the widespread delivery of a coronavirus vaccine, current and former central bank officials tell MNI.

"If they knew there is little more fiscal coming, they would probably amp up QE," Joseph Gagnon, a former Fed board economist, told MNI. Alternatively, "If they knew there would be another USD1 trillion in stimulus plus the vaccines, they would not feel any need to do more."

The Fed next week is widely expected to deliver forward guidance on the future path of asset purchases, currently running at about USD120 billion per month, or even adjust the range of bonds it purchases to focus more heavily on longer maturities.

Beyond December, officials would prefer not to increase the pace of bond buying -- with concerns ranging from its effectiveness to the size of the balance sheet -- and would like more clarity on the fiscal outlook before making additional commitments, current and former Fed staff told MNI.

Fed officials are gauging how best to navigate what Chair Jerome Powell has described as "a challenging next few months" between now and the expected rollout of a coronavirus vaccine -- all with limited monetary tools and uncertain help from feuding legislators.

"If they knew there was a big fiscal push coming then maybe doing nothing makes sense, but they don't know that," Donald Kohn, former vice chair of the Fed, said in an interview. Kohn said policymakers are likely mindful of the traditional lag between Fed monetary easing and its economic effects.

"Whatever they do will have very little effect on activity pre-vaccine," he said.

BRIDGE TO THE VACCINE

The latest USD908 billion stimulus bill floating around Congress has already hit roadblocks from both sides of the aisle. Democrats are angry at corporate liability protections from Covid-related suits while Republicans balk at substantial aid to state and local governments.

The Fed's next QE move will also depend on how much the outlook deteriorates over the next couple of months.

"If it weakens, I think they'll move toward a more aggressive stance," said Joseph Haslag, a former Dallas Fed economist, in an interview.

November showed a sharp deterioration in hiring after the economy recovered just over half of the 22 million jobs lost during the first two months of the pandemic. Officials worry about the prospect of more small business failures and financial hardship for households whose unemployment benefits are expiring.

The fiscal uncertainty is heightened by the still open-ended outcomes of two Georgia run-off races that will determine control of the Senate. While seen as an uphill climb for Democrats, a sweep of both seats could open up room for a much larger fiscal package in coordination with the incoming administration of Joe Biden.

"If they feel that fiscal support can provide a bridge to the springtime supporting the unemployed and supporting cash-strapped businesses and that the vaccines and broader distribution are there, then that lessens the need to do something on QE in the next few months," ex-NY Fed economist Steven Friedman told MNI.

NOVEMBER MINUTES

Minutes from the Fed's November meeting contained unusually detailed insights into the central bank's deliberations about tools for further accommodation, noting it "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 prospect of a coronavirus vaccine rollout has some Fed officials starting to wonder whether the economy might not recover more quickly than had been foreseen once the public health threat has lifted. However, officials have emphasized they would simply welcome such an outcome as bringing the Fed closer to its still-distant price stability and maximum employment objectives--and they don't intend to tighten monetary policy for several years.

"It's pretty clear they're worried about demand in the medium- to long- run and they're not worried about inflation," Kohn said.