MNI REVIEW: Fed Chooses QE Guidance Over Expanding It

The Federal Reserve on Wednesday left benchmark rates near zero and committed to buy at least USD120 billion a month of debt until the economic recovery makes "substantial further progress," declining to ease further by boosting purchases or shifting them toward the longer end of the yield curve.

The decision wraps an extraordinary year of actions to bolster the economy battered by Covid-19. Despite record-high and still rising caseloads and death rates, new vaccines have convinced policymakers the economy will resume solid growth next year.

"My expectation -- and many people have the expectation that the second half of next year the economy should perform strongly. We should be getting people back to work. Businesses should be re-opening," Fed Chair Jay Powell told reporters after a two-day FOMC meeting. "The issue is the next getting through the next four, five, six months," which are sure to be "very challenging," he added.

"The overarching message is our guidance for interest rates and asset purchases will keep monetary policy accommodative until maximum employment and price stability goals are achieved," he said.

He suggested the economy didn't need the extra move of extending the duration of asset purchases, but said that the Fed retained that flexibility. "Any time we feel like the economy could use stronger accommodation, we would be prepared to provide it. But right now we are providing a great deal," he said.

VAGUE ON 'FURTHER PROGRESS'

"The Federal Reserve will continue to increase its holdings of Treasury securities by at least USD80 billion per month and of agency mortgage-backed securities by at least USD40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals," the FOMC said in its post-meeting statement Wednesday.

Powell declined to outline what "substantial further progress" would mean, saying only that the FOMC would signal well in advance of winding down stimulus that the economy appeared to be on that path.

He pointed to durable goods sales and the hot housing market as examples of how current stimulus was supporting the economy, and noted some weakness was better addressed by fiscal policy such as replacing lost incomes.

"In the near term, the help that people need isn't just from low interest rates that stimulates demand over time and works with long and variable lags," he said. Government policies are creating a "bridge" across the "economic chasm that was created by the pandemic," he said, but "there is a group that don't have a bridge yet. That is who we are talk willing about. It's the 10 million people who lost their jobs and people who may lose their homes."

STUBBORN SLOW-FLATION

The roughly USD900 billion fiscal package under negotiation in Congress that would include a second round of direct payments and boost unemployment benefits would be "welcome," he said. Sources have told MNI that the Fed may be forced into boosting QE early next year if fiscal stimulus doesn't come soon enough.

Of 17 FOMC officials, only a few see headline PCE inflation rising above 2.0% in 2023, even as five policymakers now see it appropriate to lift rates by then, one more than in September.