MNI REVIEW: Fed Opens Door To More QE, Presses Need for Fiscal

Federal Reserve Chair Jay Powell on Thursday opened the door to further easing via the Fed's asset purchase program even as the FOMC made no change to monetary policy at a particularly sensitive political moment for the country.

"Today we had a full discussion of the options" around quantitative easing, which was "quite useful," Powell said in his press conference following a two-day FOMC meeting the same week as the presidential election.

"We understand that there are a number of parameters that we have where we can shift the composition, the duration, the size, the life-cycle of the program. All of those things are available to us as ways to deliver additional accommodation if we think that is appropriate," he said. "We may reach a view at some point that we need to do more on that front."

Further fiscal aid "can do what we can't" by replacing lost income for the unemployed, and the recovery will progress faster if we have a broad set of policies from across the government, Powell said. "I think we'll have a stronger recovery if we can just get at least some more fiscal support."

'TWIST' NEXT?

Former officials have told MNI that a shift toward purchases of longer-dated assets could come as early as the next meeting Dec.15-16.

For now, the Fed will continue to increase its securities holdings "at least at the current pace" over coming months, which has been USD80 billion of Treasuries and USD40 billion of MBS per month, it reaffirmed in its statement Thursday. It also kept its benchmark interest rate anchored at the zero lower bound, where it has been since emergency cuts seven months ago in March in the early days of the coronavirus pandemic.

"We haven't looked at reducing asset purchases," Powell said Thursday. He also reiterated that the central bank is committed to using its full range of tools to bolster the economy.

The economic recovery has been better-than-expected and "tail risks have subsided" since March, Powell said, but warned "we have to be humble about where we are right now" and be cautious about saying that tail risks have been completely eliminated as the pace of overall economic activity has moderated recently.

"The recent rise in new Covid-19 cases both here in the United States and abroad is particularly concerning," he said. "The risk that households will run through their savings that they've managed to accumulate on their balance sheet which will limit activity" if further relief isn't forthcoming.

POLITICAL RESISTANCE

"The Fed is being clear - more clear than it has ever been before - that it doesn't want to be alone without Congress in fighting to support the economy," Claudia Sahm, a former Fed Board economist, told MNI. "I believe Powell is being more optimistic about fiscal stimulus than is warranted."

Powell acknowledged that discussions in Washington "suggest generally that there will be something" out of Congress but kept his usual distance from speaking about politics, including the elections, and declined to prescribe specifics on the size or timing of fiscal stimulus.

The central bank will "take into account all external factors and do what we need to do with the tools that we have," he said.