MNI EXCLUSIVE: Fed May Formalize QE as Policy Anchor in June

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve is laying the groundwork to turn its

bond buying from a market-soothing mechanism into an active policy tool aimed at

keeping borrowing costs down to spur economic recovery, former Fed economists

told MNI.

     The shift could come over the next two policy meetings, perhaps as early as

June, as the central bank gains confidence that measures aimed at unfreezing

credit markets are having the desired effect -- and it obtains greater clarity

on the outlook.

     Policymakers would also likely strengthen forward guidance about how long

the Fed intends to keep monetary conditions ultra easy, or lay out preconditions

for an eventual policy reversal.

     "They will convert QE from being a market stabilizing proposition to being

part of monetary policy, open-ended and tied to success on their mandates,"

Julia Coronado, ex-Fed economist and president of MacroPolicy Perspectives, told

MNI.

     Officials have so far hesitated using the term quantitative easing, but

that may be about to change. Fed Chair Powell hinted about shifting gears during

his press conference Wednesday.

     --POWELL THINKING

     "We have done a lot of thinking about what monetary policy might look like

over coming months, and that would depend on where we are in a range of

potential economic scenarios," he said.

     The Fed did not alter policy at its April meeting, but the FOMC statement

referenced "considerable medium term" risks that suggest policymakers are

bracing for a prolonged slump.

     GDP shrank 4.8% in the first quarter and the slump will deepen in the

second. The unemployment rate is surging at a record clip deep into the double

digits, with few clues into how quickly it might recover.

     Powell said officials worry about "the possibility of damage to the

productive capacity of the economy," as workers become more loosely attached to

the labor force and businesses shut.

     --LONG BATTLE

     To Roberto Perli, former Fed economist and managing director at Cornerstone

Macro, Powell's tone shows "the Fed is preparing for a long battle against the

Covid-19 shock and its aftereffects."

     The Fed lacked data needed to back a major move this week, something Perli

said will show up soon as the record 30 million jobless claims filed in the last

six weeks are processed.

     Perli told MNI the Fed will eventually introduce yield curve control, where

the central bank commits to purchasing as many assets as needed to keep key

borrowing costs below desired levels for a prolonged period.

     "The FOMC doesn't yet have a formal forecast, and it's hard to make a

statement about future level of rates in the absence of it," said Perli. Policy

makers are likely working out internal disagreements about the exact wording

that forward guidance takes.

     "It's probably too early to make the shift to yield curve control, so it's

likely they will say something clearer about the path of asset purchases in

June," Perli said. "But eventually I think they will get there."

     Perli viewed Powell's bearish outlook as a signal that "rates are likely to

stay at zero for several years--and the Fed will eventually say this much."

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

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