MNI PREVIEW: Fed To Issue QE Guidance, Debate Maturity Shift

The Federal Reserve is expected to hold its benchmark interest rate near zero and deliver forward guidance around QE on Wednesday, bolstering the promise to buy at least USD120 billion of bonds a month until the economy improves.

Officials have hinted that shifting asset purchases toward the longer end of the yield curve is unlikely at this meeting, but additional easing is certain to be debated as the labor market recovery falters amid record-setting coronavirus caseloads and deaths.

"While participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary, they recognized that circumstances could shift to warrant such adjustments," minutes of the November meeting said. The minutes also said that tying asset purchases to economic variables could be an option.

The medium-term outlook has brightened since the FOMC last met, and will likely be reflected in the update to the Summary of Economic Projections. Breakthroughs in Covid vaccines are being quickly ratified by authorities and rolled out to the public in the UK and Canada, with the U.S. soon to follow. Congress has also made some progress on another fiscal support package of around USD1 trillion, though the delay has created concerns at the Fed about layoffs and scarring with some jobless benefits due to lapse at year-end.

Near-term uncertainty also remains high because November job growth missed expectations and initial claims notched the largest increase since March this week as states issued new restrictions to contain the spread of the virus.

The Fed's asset purchases are offering substantial support to the recovery and the FOMC will convey next week that they should continue until certain economic outcomes are achieved. Richmond Fed President Tom Barkin told MNI that "qualitative" guidance such as pledging to keep QE operating "until we see some sufficient strengthening in the labor market" would be useful.

EASING BIAS

The guidance will also imply that asset purchases would taper and cease sometime before rates lift off the zero lower bound.

There is pressure on the Fed to ease further, especially if fiscal stimulus is insufficient. Beyond shifting the maturity of purchases, officials could step up the pace of bond buying.

If former Fed Chair Janet Yellen is confirmed as Treasury secretary, she could revive emergency lending programs that expire at year-end or create new ones in a coordinated effort with the Fed.

Even as economic prospects improve, the Fed will be careful to avoid any suggestion it will pull back support until officials are confident the pandemic-driven downturn is behind them. The median expectation of near-zero rates into 2023 will likely remain unchanged in the dot plot, with Fed Chair Jay Powell likely downplaying a positive swing in the economy for now.