Fed backed advance notice before changing bond purchases



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Federal Reserve officials last month backed advance notification before the central bank changes its $ 120 billion in monthly bond purchases.

Minutes of these discussions released on Wednesday show broad support for adding language to the Fed’s policy statement to indicate that purchases would continue “until further substantial progress” has been made. towards the central bank’s maximum employment and price stability objectives.

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The language added at the December meeting was seen as a way for the Fed to assure financial markets that there would be no quick end to buying. The central bank buys bonds monthly to provide additional help to an economy struggling to emerge from a recession induced by a coronavirus pandemic that has resulted in the loss of millions of jobs.

The Fed’s move appears to be aimed at avoiding a premature market-triggered rise in borrowing costs that could raise interest rates on mortgages, auto loans, and other consumer and business borrowing activities. .

The minutes note that various Fed policymakers have stressed that any change in the size of purchases should only be made after the Fed has “clearly communicated” its changed assessment of the economic situation “well before” the time. where she planned to change the pace. or the size of bond purchases.

The monthly purchases, made up of $ 80 billion in treasury bills and $ 40 billion in mortgage-backed securities, are intended to put downward pressure on long-term interest rates. This at a time when the Fed cut its key rate governing short-term interest rates to an all-time high of zero to 0.25% and indicated that it plans to keep that rate as low at least until. the end of 2023.

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The emphasis on clear communications is reminiscent of one of the Fed’s worst communications mistakes. In 2013, then-president Ben Bernanke suggested that the Fed may soon start cutting back on bond purchases that were being made to put downward pressure on interest rates to spur a timid recovery. after the 2008 financial crisis.

Bernanke’s statement surprised the markets and caused bond yields to rise immediately. Fed officials had to rush to assure investors that no immediate cuts in bond purchases were planned. The incident has been called the “taper tantrum”.

The minutes of the Fed’s December discussion, released on Wednesday after the usual three-week delay, did not say what would constitute “further substantial progress” in meeting the central bank’s economic goals. The minutes said officials believed any change in bond purchases would not be based on “specific numerical criteria or thresholds.”

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The Fed will then meet on January 26 and 27 and analysts believe it will leave its benchmark rate at the ultra-low level it has been at since last March, with bond buying continuing at the same pace as they are now. carried out.

Analysts said the minutes from the December meeting reinforced this view. Pash Ashworth, chief economist at Capital Economics, said the December meeting revealed that “Fed officials are in no rush to change the monthly pace or mix” of bond purchases.

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Various Fed officials have warned that the winter months could see a slowdown in activity due to the surge in coronavirus cases, with more government help likely needed. Last month, Congress approved a $ 900 billion relief package and President-elect Joe Biden said he would push for more aid after taking office on January 20.

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