MNI EXCLUSIVE: Fed Still Biased Toward More Bond Buying

Federal Reserve policymakers are still more likely to increase monthly bond buys in the near-term than to trim the pace of purchases, especially if the U.S. vaccine rollout remains disappointingly slow, ex-central bankers told MNI.

While the last-minute passage of a USD900 billion fiscal stimulus has taken some pressure off the central bank, leading to some speculation about a possible tapering of bond buys, policymakers continue to lean toward doing more rather than less.

"They would increase the stimulus if it were necessary to keep interest rates down," said Thomas Hoenig, ex-Kansas City Fed president, in an interview. "Whether that means buying the same amount each month or whether they have to increase that -- they'll do it."

A fractured distribution system and other logistical problems have marred the initial phase of vaccine distributions in the United States, potentially throwing a wrench into expectations that inoculations might be widespread by summer.

"That makes the vaccine issue all the more challenging and important," Hoenig said. "We're not off to an auspicious start."

The Fed in December offered fresh guidance on asset buying, saying it would keep acquiring Treasury and mortgage bonds at the current USD120 billion monthly pace until officials see "substantial further progress" toward the central bank's maximum employment and price stability goals.

DEFINING PROGRESS

However, officials expect economic activity to weaken further, if not return to outright contraction in the first quarter, before improving again once vaccines are widely available and consumers and businesses can return to a semblance of normality.

Darkening growth prospects in Europe, where the UK has gone into a shutdown much like that of last spring, also clouds the outlook.

Charles Steindel, a former New York Fed economist, says the Fed is probably going to define substantial progress fairly loosely -- meaning a longer period of at least the current rate of QE.

"Until we have more normal activity, with the labor force participation rate rising and people going back to work, the Fed is just going to keep going on all cylinders," he said.

"Everything is still up in the air," he added. "They certainly will not think the fiscal package somehow means they will need to do less in the short run."

Indeed, Steindel wonders whether a slower vaccine distribution than had been anticipated might not require more fiscal action from Congress beyond the USD900 billion agreement signed last month, which included direct payments to individuals and support for small businesses.

"Given the road of slowness of how the vaccine is being rolled out, we may need another stimulus package in the spring," he said.

A Democratic sweep in two Georgia runoff Senate races would make any such efforts easier, he said. As of 6:30 am, ET, one race had been widely called for the Democrats while the party held another lead in the other with 95% of votes counted.

Even such a victory, however, would not guarantee more fiscal help for consumers and businesses. "I would be surprised if we get substantially more fiscal stimulus, even if the Democrats win both seats in Georgia," said Douglas Elmendorf, a former senior Treasury official and Federal Reserve economist, because moving legislation through Congress requires 60 Senate votes, not a simple majority.

That leaves the central bank's easy monetary stance as still a key, if no longer the only, game in town.

"The Federal Reserve's modeling probably suggests that the economy still needs more stimulus, it needs more support," Elmendorf told MNI.