MNI POLICY: Fed Wants 'Substantial Progress' Before QE Shift

The Federal Reserve on Wednesday offered new guidance on its bond buying program, pledging to keep buying Treasuries and mortgage-backed securities at the current pace of at least USD120 billion a month until "substantial further progress" has been made toward its full employment and price stability goals.

"The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term," the Fed warned. The decision came with no dissents.

"These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses." The statement didn't outline a plan to extend the maturity of Treasuries purchased, as some investors anticipated.

Policy makers' views around rate increases reflected a slightly more hawkish tilt, with the "dot plot" now showing one call for a rate increase in 2022 and five in 2023.

VACCINE OPTIMISM

The Fed's quarterly forecasts showed a much less severe decline in economic activity this year, with stronger readings for 2021 and 2022. Policy makers now see the economy contracting an annualized 2.7% this year, compared with estimates for a 3.7% drop as of September. Next year was upgraded to 4.3% from 4%, likely because of optimism surrounding the rollout of a coronavirus vaccine.

"Weaker demand and earlier declines in oil prices have been holding down consumer price inflation," the Fed said.

Unemployment rate projections for this year were lowered, as was to be expected given that the official rate of joblessness, while masking some deep underlying weaknesses, has fallen faster than expected to 6.7% in November.

Fed Chair Jerome Powell will hold a press conference starting at 2:30 pm. He's likely to face questions about how much deteriorating economic conditions due to surging Covid infections will affect Fed policy in coming months.

The Fed responded forcefully to the pandemic-led slump in markets and the economy starting in March. It lowered interest rates to just above zero and launched a series of emergency lending programs to unfreeze credit markets.

The central bank in September also vowed not to raise interest rates until "labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2 percent for some time."