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MNI (Washington)
The Federal Reserve won't rush to ramp up QE in compensation for Treasury Secretary Steven Mnuchin's decision to end emergency lending facilities, another burden on the world's largest economy amid rising Covid cases, former officials told MNI.

The Fed is already buying at least USD120 billion a month of MBS and Treasuries, and expanding the balance sheet further may not be the best way forward, former Richmond Fed President Jeff Lacker told MNI Friday. "The Fed may juice up its asset purchases, but I doubt they have much confidence in their efficacy, so it represents more of a symbolic gesture than any serious monetary stimulus," he said.

Acting before the Dec. 15-16 gathering is unlikely because an accelerated policy action "signals heightened alarm and can undermine fragile confidence," former Atlanta Fed President Dennis Lockhart said.

"I suspect the Fed will remain its deliberate self and take up QE options at its next meeting," he said. "The Treasury decision along with, as of now, no fiscal relief package may spur the Fed to fast track a decision in December that might otherwise have taken two meetings -- December and January."

Boston Fed President Eric Rosengren told MNI last Tuesday he would prefer to see the Fed lengthen the average duration of its Treasuries purchases rather than increase buying. Rosengren also questioned whether it would be a good idea to end the central bank's emergency lending facilities.


While QE is good for keeping a lid on longer-term rates "to promote as vigorous a recovery as would be ideal," former director of research at the Fed Board of Governors David Wilcox said, they aren't as good at sustaining confidence in pockets of the market.

Pulling down the backstops leaves an "outside chance" of becoming a "tremendously ill-timed and unnecessary move that puts the recovery at further jeopardy," said Wilcox, senior fellow at the Peterson Institute for International Economics. Interest rates, QE and credit policy "all need to be part of the policymaker repertoire, but they're not substitutes for one other," he said.

Still, Lacker suggested Treasury has some reason to scale back programs because they had limited uptake. "That strikes me as strong evidence that the business and consumer credit markets the programs targeted were not as dysfunctional as the Fed presumed," he said.

Fed officials have long argued that even if little used, having the facilities in place helps keep the market's confidence in a year when even bedrock Treasury markets faced a squeeze.


Mnuchin's decision is a turn from earlier in the year when the Fed praised the government for putting cash in people's pockets as many self-isolated to avoid contracting Covid. The Fed responded late Thursday with a rare dissent saying the fragile economy would benefit from extending programs, and the move contradicts IMF advice to G20 leaders to keep programs in place until Covid is under control.

Chicago Fed President Charles Evans told CNBC Friday the Fed "can do more" on QE and he was disappointed in Treasury's decision. "There are a lot of challenges so there are risks, it would be good to have more support coming from all directions," he told CNBC.

Those kinds of messages from the Fed may put the file back on Joe Biden's desk early next year, and yesterday he praised the central bank's overall approach.

With the labor market on track to deteriorate over the near term, Lacker said "it wouldn't surprise me if the incoming administration were more inclined toward credit market intervention."

MNI Washington Bureau | +1 202-371-2121 |