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Fed Minutes Note Discussion On Bond Purchases To Help Economy

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EDITOR NOTE: In its latest minutes, the Federal Reserve noted that the economy is “tilted to the downside.” A resurgence in pandemic cases causing widespread second lockdowns is something of major concern. The Fed was hoping that an additional fiscal program would be issued by year’s end. That isn’t happening, placing the burden on the central bank to use its monetary tools to prevent the downward “tilt” from turning into a sudden drop. More money printing is on the way. And with it, higher inflation and a weaker dollar. There may be a limit to the efficacy of this medicine, the Fed noted. The US economy is under significant strain to bide time for the country to put a lid on the disease’s spread. With many Americans clamoring for their personal and economic freedoms, seeing masks as a political symbol and not a healthcare precaution, that lid isn’t coming anytime soon. And the bottom gives way.

Federal Reserve officials indicated at their last meeting that adjustments could be made soon to their bond-buying program as the central bank looks to alternate ways it can support the economy.

The Fed on Wednesday released minutes from its Nov. 4-5 policy meeting. Officials at that gathering voted to keep benchmark short-term borrowing rates anchored near zero.

Market participants were looking to the minutes to gauge where policymakers stand on possibly ramping up or adjusting the asset purchase program, which currently has the Fed buying $120 billion of Treasurys and mortgage-backed securities a month. The central bank could choose to increase the purchases or to lengthen the duration of those bonds.

While members said the current pace of purchases was helping keep financial conditions accommodative, they noted that changes could be enacted if necessary. The discussion, however, did not entail a specific date for changes, only that they could happen “fairly soon.”

“Participants noted that the Committee could provide more accommodation, if appropriate, by increasing the pace of purchases or by shifting its Treasury purchases to those with a longer maturity without increasing the size of its purchases,” the minutes said. “Alternatively, the Committee could provide more accommodation, if appropriate, by conducting purchases of the same pace and composition over a longer horizon.”

Since the meeting, multiple Fed officials have disclosed that an involved discussion over the asset purchases took place at the gathering. An entire section of the minutes is devoted to those discussions.

Changes in ‘coming months’

Federal Open Market Committee officials also expressed concern about the pace of the economic recovery, noting that growth was still well off the pace before the coronavirus pandemic hit in March.

During his post-meeting news conference, Fed Chairman Jerome Powell said he feels that the Fed still has plenty of policy “ammunition” and pledged that the committee is “strongly committed to using these powerful tools to support the economy.”

Since then, the Fed has learned that it will start 2021 without some of the weapons in its arsenal, as Treasury Secretary Steven Mnuchin has directed the central bank to return collateral funding it received for multiple pandemic-era lending programs. They include corporate bond purchases, loans to state and municipal governments, and the Main Street Lending Program for small- and medium-sized businesses.

Members suggested that “over coming months” the Fed should provide more detail about what it will take to adjust the program, which has taken the central bank balance sheet past $7 trillion as part of efforts to support the economy through the coronavirus pandemic.

Officials favor an outcomes-based approach that would tie the purchases to achieving certain economic goals. The committee also noted that it would tie the purchases to interest rates, with the bond-buying program likely to wind down before rate hikes.

Market participants have been anticipating a possible Fed announcement at the December meeting.

Looking to the economy, Fed officials said they were assuming that no fiscal support package would be enacted by the end of the year. However, they said households in aggregate had saved enough money to support consumption through the end of the year. They also noted that tax receipts showed the situation for most states and municipalities wasn’t as bad as some had feared.

Still, they said economic forecast risks are “tilted to the downside, with the latest data suggesting an increased probability of a resurgence in the disease.”

Members “noted that economic activity and employment had continued to recover but remained well below their levels at the beginning of the year,” the minutes said.

Originally posted on CNBC

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