MNI STATE OF PLAY: Fed May Underline Patient QE Plan

The Federal Reserve is expected to keep buying USD120 billion in Treasuries and mortgage assets a month and hold a near-zero interest rate Wednesday while looking for evidence that new fiscal relief and wide dissemination of Covid vaccines are bringing palpable improvements to jobs and inflation.

Since their December meeting, risks have shifted more to the upside on the back of additional fiscal support and the prospect of millions getting vaccinated by summer. However, Fed officials have repeatedly warned of the lasting drag from the virus that has killed 400,000 Americans and reduced employment by 10 million.

Despite a flurry of talk about beginning to taper asset purchases as soon as this year, current and former Fed officials told MNI the Fed would have to see a significant shift in the economy's trajectory for any unwinding of QE. That kind of shift will not include the expected springtime inflation spike related to year-on-year comparisons bolstered by 2020's weakness.

The FOMC added specific forward guidance on its asset purchases at its last meeting, saying that "substantial further progress" in the economy is needed for paring back asset purchases. Sources said policymakers are likely to leave the guidance in place this week. Fed Chair Jay Powell may stick to that tight script after the varying messages about tapering from other officials helped helped push up Treasury yields and risk driving further spikes in coming months.

RECOVERY TRACTION BEFORE TAPER

"Now is not the time to be talking about exit," Powell said Jan. 15. "We're strongly committed to our framework and using our monetary policy tools until the job is well and truly done."

The Fed welcomed the USD900 million relief legislation passed last month and have signaled their willingness to accommodate the boost without moving rate hikes forward. President Joe Biden is also seeking another USD1.9 trillion package, though negotiations with Republicans may mean a smaller amount is authorized. Officials are committed to seeing inflation reach 2% before lifting rates from zero.

"Rather than tapering early, and potentially prematurely, and assuming the recovery really gains traction once the vaccine is widely distributed, I hope the Fed will instead return to the question that was at the top of the agenda on the eve of the COVID-induced collapse," former Fed Board research director David Wilcox told MNI. That issue was "whether the economy can sustain a higher level of employment now-- without generating undue inflationary pressures -- than previous estimates suggested," he said.

"Particularly with the recently declared intention to tolerate a mild inflation overshoot, the institutional patience to explore that question should be there," he said.

'VERY SERIOUS SITUATION'

Meanwhile, the U.S. health threat remains a "very serious situation," according to the country's top infectious disease expert Dr. Anthony Fauci, who's advising Biden on his national pandemic response. The latest economic data has disappointed, with the labor market losing 140,000 jobs in December and retail sales hurting as restaurants, bar, hotels and entertainment venues shut down.

December's USD900 billion aid package boosted unemployment benefits and sent more checks to lower income households. Biden's proposal could see cumulative cash payments upped to USD2,000 to support household spending.

The Fed's policy statement is not expected to mention fiscal policy, but officials are certainly eyeing a clearer path for the recovery. Powell also holds a press conference Wednesday where he may expand on QE and fiscal policy changes.