- Federal Reserve officials are set to meet on Tuesday and Wednesday, and could offer new insight into when the central bank will pare back on its monetary policy support.
- The Fed’s asset-purchase program has aided market functioning and stifled interest rates for months. Yet its eventual unwinding could shock markets, and the Fed will likely look to signal ahead of time when such a reversal will take place.
- Previous meeting minutes suggest the Fed will update its guidance soon and may link the program’s closure to containing the coronavirus, Michael Feroli, chief US economist at JPMorgan, said.
- Feroli also expects the bank to begin purchasing longer-dated Treasurys to pull long-term rates lower and further boost spending.
- Visit Business Insider’s homepage for more stories.
The upcoming meeting of the Federal Open Market Committee might offer fresh clues as to when the US central bank will begin to pull back on its economic relief efforts.
The FOMC is scheduled to meet on Tuesday and Wednesday, with Wednesday’s meeting concluding with the release of new economic projections and an update to its policy strategy. Policymakers signalled in November that updated guidance should “help keep the market’s expectation for future asset purchases aligned with the committee’s intentions.”
That portion suggests the FOMC might want to start weaning the market off of the multibillion-dollar purchase programs soon, Michael Feroli, chief US economist at JPMorgan, said in a note. The central bank currently purchases $US80 billion a month in Treasurys and $US40 billion a month in mortgage-backed securities to push borrowing costs lower.
The program has propped up the virus-slammed economy since it began in March, but strategists have wondered how the market will react to its eventual end. A rushed and unexpected withdrawal could spook investors, pull cash from the market, and lift borrowing costs.
Previous Fed minutes signal its asset-purchase guidance could hinge on the course of the pandemic, Feroli said. To safeguard against concerns of premature unwinding, the Fed could pledge to continue its purchases until three, six, or 12 months after the virus threat fades.
Another possibility is that the committee avoids offering new guidance and keeps markets guessing until 2021, the economist added.
JPMorgan initially expected the Fed to also adjust its purchases to focus on longer-dated Treasurys. Such a shift would place greater pressure on long-term rates and, in turn, further promote spending on rate-sensitive products like homes and cars.
Several regional Fed presidents indicated in recent interviews that they would rather not change the purchase plan at the December meeting, and instead wait to see if further easing is necessary.
Still, Feroli expects a shift to buying longer-maturity bonds. Slowed hiring and rising COVID-19 case counts suggest “the labour market could slip even further in the winter months,” he said. Vaccine distribution will aid the economic recovery, but widespread vaccination likely won’t be achieved until well into 2021, he added.
Some may argue that the central bank will look to keep its powder dry until a greater risk emerges. Yet with the Fed currently missing its own targets, the December meeting is the right time for an adjustment, Feroli said.
“They have an employment mandate that they are missing and will continue to miss and they have tools to mitigate this labour market shortfall,” the economist added.
‘We are very confident that the stupid is currently alive and well in this market’: Jeremy Grantham’s heir apparent Ben Inker breaks down how GMO plans to profit from the growth bubble through a new long/short equity strategy
Business Insider Emails & Alerts
Site highlights each day to your inbox.