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FOMC preview: Fed to take a 'wait-and-see' approach to quantitative easing

Brian Cheung
·Reporter
·6 min read

With the outcome of the U.S. election still unfolding, many may have forgotten that the Federal Reserve is scheduled for another policy-setting Federal Open Market Committee (FOMC) meeting. But those tuned out may not miss much — little new is expected from the Fed’s announcement on Thursday at 2 p.m. ET.

The central bank has messaged its intention to keep interest rates near-zero for at least the next few years, shifting the focus on further stimulus to the Fed’s asset purchase program, or “quantitative easing.”

But with COVID-19 cases rising globally and the dust from the election likely to cloud the Fed’s meeting, Fed policymakers may defer to the December meeting for further action.

“The uncertainty surrounding the election and fiscal policy in particular will be another reason for them to stand by,” wrote UBS in a note October 30.

But the Fed has made it clear that it is not out of tools to prop up the economic recovery. Fed officials have made it clear that they could adjust the central bank’s purchases of agency mortgage-backed securities and U.S. Treasuries under QE. The Fed, now sitting on a $7 trillion balance sheet, is currently pacing its purchases at about $120 billion each month.

Fed officials in recent weeks have hinted that they could tweak those purchases by either ramping up the aggregate purchases or targeting those purchases toward the long-end of the yield curve.

“There is still quite a bit of flexibility in the asset purchase side right now, and it allows us flexibility to also provide more accommodation if that's necessary,” Evans told Yahoo Finance in an exclusive interview on October 8.

Wait-and-see

A “wait-and-see” approach, as Capital Economics expects, may give the Fed more time to observe the market reaction to the election and the economic effect of rising COVID cases.

For example, a Democratic victory over the White House and the Senate could meaningfully push longer-term interest rates higher. Such a scenario may push the Fed to skew its purchases toward longer-dated U.S. Treasuries to push longer-term borrowing costs down, as opposed to simply ratcheting up the total monthly pace of purchases.

“The bigger thing to watch for will be any hints as to how the Fed is interpreting the risks to the outlook, with a renewed wave of infections a downside risk and the potential for a bigger post-election stimulus on the upside,” CapEcon’s Michael Pearce wrote on October 28.

For Fed Chairman Jay Powell’s press conference on Thursday afternoon at 2:30 p.m. ET, the key will be dancing around commentary on the election while reminding markets that its finger is on the QE trigger.

Federal Reserve Chair Jerome Powell wears a protective mask as he arrives for a House Select Subcommittee on the Coronavirus hearing on Capitol Hill in Washington on Wednesday, Sept. 23, 2020. (Stefani Reynolds/Pool via AP)
Federal Reserve Chair Jerome Powell wears a protective mask as he arrives for a House Select Subcommittee on the Coronavirus hearing on Capitol Hill in Washington on Wednesday, Sept. 23, 2020. (Stefani Reynolds/Pool via AP)

Here’s what members of the FOMC have said about quantitative easing:

Fed Chairman Jerome Powell: “There are various ways and margins that we can adjust our tools going forward, and we’ll continue to monitor developments. And we’re prepared to adjust our plans as appropriate.” (Press conference, September 16)

Fed Vice Chairman Richard Clarida: “We also stated that the Federal Reserve will, over coming months, continue to increase our holdings...at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions.” (Remarks at American Bankers Association, October 19)

Fed Vice Chairman Randal Quarles: “We are sensitive as well to the point that there is some confusion — or at least unclarity — about how we are thinking about asset purchases going forward, and so as the FOMC meets over the next few meetings, I expect that we will have discussions about our communication policy around asset purchases.” (Remarks at Managed Funds Association, October 21)

Fed Governor Lael Brainard: “Continued asset purchases will help achieve these outcomes by keeping borrowing costs low for households and businesses along the yield curve.” (Remarks at Society of Professional Economists, October 21)

Fed Governor Michelle Bowman: No public remarks on QE.

Boston Fed President Eric Rosengren: “While I think it would help to do more quantitative easing, I'm not sure it would be nearly as supportive, for example, as fiscal policy.” (Yahoo Finance interview, September 24)

New York Fed President John Williams: “Given this uncertainty, transparency and flexibility in our policy approach will enable us to respond to changes in the outlook as they happen.” (Remarks at Hoover Institution, October 7)

Philadelphia Fed President Patrick Harker: No public remarks on QE.

Richmond Fed President Thomas Barkin: “The net of all this is a message that the Fed will aim to keep rates low until we see moderate overshoots of inflation or the development of financial stability risks....We also continue to engage in significant bond purchases that provide additional accommodation.” (Remarks at Economic Club of New York, October 15)

Atlanta Fed President Raphael Bostic: “On balance, I am comfortable with our current policy stance...Though the U.S. economy continues to show clear signs of recovery, there remain significant portions where the recovery has been weak or nonexistent.” (Remarks at SIFMA, October 19)

Chicago Fed President Charles Evans: “If things were somewhat worse, if the recovery was slower, I think we'd still be having interest rates at the zero lower bound, but I think we'd also be following it up with more asset purchases.” (Yahoo Finance interview, October 9)

St. Louis Fed President James Bullard: “I think the most likely direction [for more stimulus] would be quantitative easing, if we needed to do more.” (Wall Street Journal interview, October 6)

Minneapolis Fed President Neel Kashkari: “If you can’t pay your bills, more quantitative easing is a poor substitute for extended unemployment insurance. Only Congress has the ability to get that direct fiscal aid to the small businesses and to the Americans who have lost their jobs.” (Remarks at New York University, October 15)

Kansas City Fed President Esther George: “Without the space to cut interest rates, the Federal Reserve is likely to have to rely more on asset purchases and other non-interest rate policies to address downturns in the economy.” (Remarks at Wichita State University, October 8)

Dallas Fed President Robert Kaplan: “Could the 10-year and 30-year yields be lower? Yes. Is it an impediment? We’re already buying a significant amount of bonds as it is, and I’d be skeptical about the benefits of doing more.” (Bloomberg interview, October 8)

San Francisco Fed President Mary Daly: “We need to watch [the economic recovery] before we make specific decisions about our asset purchases, and I don’t want to be premature in that.” (Wall Street Journal interview, October 15)

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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