Wrightson ICAP Preview: More Formal Asset Purchase Guidance

Wrightson ICAP thinks "in a close call" that the Fed will introduce more formal asset purchase forward guidance at the December meeting, however it will not increase the pace / alter composition of purchases "for now".

• With little urgency suggested by Fed speakers, "it would not be a complete shock if the Fed waited until January to come to a decision".
• Guidance to be 'outcome-based' and 'qualitative' rather than quantitative, with no numerical preconditions for a taper, rather it would be dependent on making "substantial" (a somewhat vague term) progress toward dual mandate goals.
• Providing the guidance sooner rather than later would aid impression that Fed didn't plan to hike soon after tapering (the point of QE guidance is to avoid a taper tantrum) and will reinforce expectations that purchases will slow at some point over the next 4-6 quarters.
• "The sooner the Fed formulates its asset-purchase guidance, the better the odds that the market will view the decision to taper in late 2021 or early 2022 as part of an orderly decision-making process rather than as a sign of a sudden, alarming change in policy views...the earlier the Fed announces its asset-purchase guidance, the less hurried the eventual cutback will seem."
• As for more buys/changing mix of QE, a program that is "smaller in terms of dollar volume but which took more duration out of the market seems like a win-win for the Fed." But this might be tough to communicate.