JPMorgan Preview: Straightforward Case To Extend WAM

JPM expects focus at the December FOMC to be on the Fed's asset purchase program, with the introduction "qualitative outcome-based guidance" on purchases with the FOMC committing to buying securities "for as long as the public health crisis weighs on economic activity." – as the FOMC "wants to start the process of getting the market away from a QE-infinity mindset".

• JPM also expect the FOMC to extend the WAM of Tsy purchases, the case for which is "straightforward" (mainly due to a weakening labour market) though confidence in this call "has waned since commentary from several regional bank presidents has recently called into question the need to take any further action to support the economy".
• Fed could want to "keep its powder dry" but this line of reasoning has never been persuasive to the FOMC, and they enhanced fwd guidance in September even though rates were already low.
• JPM: "An explicit easing action could help to mollify any tantrum response if the market's expectation and Fed's intentions for the purchase horizon are misaligned."
• QE guidance unlikely to adopt inflation or unemp thresholds, as those are 'quantitative' – could note simply that purchases would taper and cease before the first rate hike. But "a reasonable evolution of the statement language would predicate purchases on the course of the public health crisis".
  
• Could also pledge to keep buying until "well after" the health crises passes, to avoid taper tantrum, but this would also be unclear language.