By Jonnelle Marte and Ann Saphir
(Reuters) - U.S. Federal Reserve policymakers may soon give markets a better steer on how long they'll continue to buy bonds to provide support to an economy under siege from a resurgence of coronavirus infections and still struggling to recover from a historic recession, minutes from their latest policy-setting meeting show.
The new guidance could also map out what conditions policymakers would need to see before paring back asset purchases, the minutes suggested.
Although a few policymakers were hesitant to make near-term changes to the guidance because of the uncertain outlook, "many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon," according to the minutes released Wednesday from the Fed's Nov. 4-5 meeting.
The summary of their discussions showed policymakers were worried about the downside economic risks from the rise in infections; a few also fretted about "diminished odds for further significant fiscal support."
Most participants favored moving to qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions. Policymakers signaled they will end bond purchases before they begin raising interest rates, which were slashed to near zero levels earlier this year and are expected to remain there until at least 2023
"Most participants judged that the guidance for asset purchases should imply that increases in the Committee's securities holdings would taper and cease sometime before the Committee would begin to raise the target range for the federal funds rate," the minutes said. A number of policymakers thought that even after it stops adding to its balance sheet the Fed would take steps to keep it from shrinking, as it did following the end of its last round of bond-buying.
U.S. central bankers agreed the asset purchases were providing accommodation for the economy and served as "insurance" against risks that could appear because of uncertainty created by the coronavirus pandemic, according to the minutes. Some participants said the Fed could provide more accommodation by lengthening the maturity of the securities purchased or increasing the pace of purchases, according to the deliberations.
Several policymakers also noted that there are limits to how much support the Fed could provide through purchases and expressed concern about unintended consequences, the minutes showed.
Fed officials voted to keep rates steady at the November meeting and repeated their pledge to do whatever possible to support the U.S. economic recovery.
Fed Chair Jerome Powell told reporters after the meeting that officials had reviewed options for adjusting the central bank's asset purchases and decided the current pace of $120 billion a month was providing an appropriate amount of economic support.
However, a recent surge in coronavirus infections and the looming expiration of some of the Fed's emergency lending facilities, after Treasury Secretary Steven Mnuchin asked the Fed last week to return unused funds, may require the central bank to act sooner than planned.
Mnuchin's request surprised some Fed officials who felt the programs should remain in place. According to the minutes, participants said the emergency lending programs helped to keep credit flowing to households and businesses and were still serving as “important backstops.”
Some investors already were raising their expectations that the Fed may increase its government bond purchases or adjust the maturity of bonds purchased to boost support to the economy after a resurgence in COVID-19 infections.
The Fed could tweak its asset purchase program as early as its next policy-setting meeting, taking place Dec. 15 and 16, to ease financial conditions further in the absence of a fiscal policy deal in Congress, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
“It's clear that a number of Fed officials would like to do even more in terms of monetary policy stimulus," said Arone. “The economy is facing a struggle with the rising number of coronavirus cases."
It is likely the Fed will update its forward guidance before it makes any changes to its asset purchases, Thomas Simons and Aneta Markowska, economists for Jefferies, wrote in an email note Wednesday.
New York Fed President John Williams said on Tuesday that the purchases were supporting both markets and the economy and could be adjusted if needed. "I think they're serving their purposes really well right now," he said during a virtual interview with the Wall Street Journal.
St. Louis Fed President James Bullard said on Tuesday he didn't see a need for adjusting the Fed's bond purchases after the recent success of several coronavirus vaccine candidates, which suggests the end of the health crisis may be in sight.
Both Bullard and Williams said the Fed could restart the emergency lending programs later if markets come under renewed stress.
(Reporting by Jonnelle Marte and Ann Saphir; Additional reporting by Herbert Lash; Editing by Jonathan Oatis and Andrea Ricci)