WASHINGTON: The Federal Reserve’s decision in December to leave its monthly bond purchases unchanged dismayed analysts and investors who thought the central bank should have expanded the program to better support the economy through the coronavirus pandemic.
The minutes of that meeting will be released Wednesday and are likely to detail just what drove that decision and how the Fed is factoring the promise of a coronavirus vaccine into its plans. Of greatest interest is any insight those minutes offer into what it would take for central bankers to shift monetary policy in coming months if widespread immunization triggers a stronger economic rebound.
The minutes will be released at 2 p.m. (1900 GMT), and Fed officials in recent days have already begun sketching out that next phase of their debate – a discussion likely to hinge on how successful the country is in delivering coronavirus shots to its 330 million residents.
“The faster we get that under control the more robust this recovery is going to look,” Atlanta Federal Reserve President Raphael Bostic said in an interview with Reuters this week. “We just have to ride out this time, continue to follow public health recommendations and try to minimize the spread,” while the vaccine is distributed.
Bostic said he thought it possible that by late spring or summer, businesses that have been kept off line and people that have been kept inside because of the pandemic may resume “more normal types of interaction … the middle part of the year will be quite strong.”
That, in turn, could allow the Fed to begin at least discussing how and when to pull back on the $120 billion in monthly bond purchases it has been making since last spring to keep financial markets functioning and hold long-term interest rates at their historic lows.
The Fed in December said it would keep those purchases going “until substantial further progress has been made” in returning the economy to full employment and lifting inflation to the Fed’s 2% goal. Bostic said he felt that condition might be met “in short order” this year if the vaccination rollout is successful.
The minutes are likely to give some sense of how the Fed broadly views that goal.
In economic projections issued in December, for example, policymakers at the median said they expected the unemployment rate to fall to 5% by the end of 2021. That is still well above the 3.5% low reached in February, but marks a major improvement from the 14.7% hit in April.
Cleveland Federal Reserve President Loretta Mester, however, said even that was unlikely to warrant any changes in the bond program this year.
“I’m happy with the way policy is calibrated right now…But again, it’s really going to depend on the economy,” Mester said on Tuesday.
When the Fed met on Dec. 15 and 16, it was only days after the first coronavirus vaccine had been approved. Since then a second immunization has been okayed, and distribution of both has begun.
In addition, Congress approved a $900 billion program that included help for unemployed workers and small businesses, something Fed officials urged through the fall to help fill the income gap left by the coronavirus recession.
Still, it’s not clear how fast the vaccine will allow a return to normal commerce – especially given progress with actual inoculations has been slower than expected – or whether that will lead the Fed to shift its asset purchases.
The decision on when to curb the program and how to announce it is consequential: a misstep, even saying the wrong thing at the wrong time, could lead interest rates to rise and consumers and businesses to curb borrowing and spending.
The risk of that sort of market “tantrum” coming out of a pandemic year means the Fed’s bondbuying will remain on hold through the year, analysts at Cornerstone Macro wrote this week.
“Progress against the pandemic, combined with pent-up demand, a very high savings rate, and strong fiscal support should deliver a solid economic performance this year,” Cornerstone Macro analysts wrote this week. “Even so…the Fed won’t be swayed away from its very dovish stance.”
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