MNI PREVIEW: Fed To Stand Pat After US Election; QE Steps Eyed

The Federal Reserve is expected to hold monetary policy steady at a meeting which ends just two days after Tuesday's presidential election, but behind the scenes it will examine potential additional easing, particularly in the continued absence of more fiscal stimulus.

The FOMC should keep rates just above zero while repeating the pledge to add to holdings of Treasuries and agency mortgage-backed securities at least at the current USD120-billion-a-month pace. At a time when many areas are seeing their highest Covid-19 case loads since the start of the pandemic, it will reiterate its commitment to "using its full range of tools to support the U.S. economy", and Chair Jay Powell will urge fiscal support for the unemployed, small businesses and state and local governments.

But former policymakers told MNI the Fed is already looking at ways to offer further accommodation via its asset purchase program in upcoming meetings despite concerns QE provides diminishing returns when interest rates are already very low. That could see the Fed ramping up QE, buying more longer-dated bonds, adopting yield curve control or expanding non-Treasury purchases.

Rates are likely pinned at zero into 2023 under September's forward guidance that set up a three-part test for rate hikes. Economic indicators are far from the requisite bars of full employment, with inflation at 2% and on track to exceed that.

JOB RECOVERY SLOWING

The Fed's new policy framework will encourage officials to wait longer than in the past to commence a rate-hiking cycle unless low-income families join the recovery, current and former Fed officials told MNI.

The labor market recovery has been decelerating after surprisingly fast improvements in the spring and summer. Hiring continued through October and weekly unemployment claims softened in recent weeks, but analysts note that claims under special provisions of the Cares Act are still surging, and roughly 23 million unemployed Americans are still receiving government support. More vulnerable workers are disproportionately more likely to have lost jobs than high earners.

As case counts and hospitalization rates skyrocketed in October and many businesses were constrained by social-distancing guidelines, the Atlanta Fed's initial estimate of fourth quarter GDP turned in just 2.2%, a precipitous drop from the record 33% annualized rebound in the third quarter.

Core PCE inflation has firmed over the past five months and in September was 1.6% from a year earlier, but the resurgence in Covid-19 will likely keep inflation from rising quickly.

Some Fed officials have said they might support shifting purchases to longer-dated bonds, as they await more clarity on the economic outlook. But if inflation or inflation expectations deteriorate or financial market tensions resurface, the Fed could take more forceful action.