Fed policymakers push back on QE talks

(Reuters) – Despite the optimism over vaccines and the likelihood of more fiscal stimulus under the new Biden administration, the Federal Reserve is sticking to its super-easy monetary policy, policymakers made clear on Wednesday.

“The economy is far from our targets for jobs and inflation,” Fed Governor Lael Brainard told the Canadian Association for Business Economics. “Based on my basic outlook, I believe the current pace of buying will remain appropriate for some time.”

The Fed is adding treasury bills and mortgage-backed securities to its balance sheet at a rate of $ 120 billion per month, and has pledged to keep doing so until it sees “further substantial progress.” towards its full employment and 2% inflation targets.

“Even in an optimistic outlook, it will take time to make substantial progress,” Brainard said, adding that the purchases support the recovery and “we are prepared to increase these amounts if we deem it warranted.”

St. Louis Fed Chairman James Bullard said while the job market has improved significantly, there is still a long way to go.

“Some sectors have been really hit hard and for them to come back we will have to launch this vaccine,” Bullard said in an interview with the Reuters Next conference. For the economy as a whole, “you might get a boom … but let’s wait and see if that actually happens.”

These remarks could reset the expectations of bond market players and investors who in recent days have increased bets on the central bank to cut its bond purchases before the end of the year.

They did so in part because the election of two Democratic senators in Georgia last week gives the party in the new administration Biden control of the Senate and the House of Representatives.

JP Morgan economists say this sets the stage for a new $ 900 billion stimulus package in the coming months, in addition to the $ 892 billion package adopted last month. The extra money for households, businesses and others increases the chances of the economy hitting the Fed’s “substantial progress” bar, allowing the decline to begin “by the end of the year,” they said. they wrote last week.

Expectations for the downside have also gathered momentum after Atlanta Fed Chairman Raphael Bostic and Dallas Fed Chairman Robert Kaplan said in recent days that they expected to an economic surge later this year that could allow the Fed to start cutting back on buying.

NOW ISN’T THE TIME

Analysts said now is not the right time to set the stage for a pullback in asset purchases.

“I think it’s just a mistake” to start reporting a decrease already, said Joe Gagnon, senior researcher at the Peterson Institute for International Economics and former Fed economist.

A new pandemic aid package could certainly improve the economic outlook, he said, and “it’s not unreasonable to start thinking internally about this – but I don’t know how much he is in a hurry to talk about it publicly.

The minutes from last month’s policy meeting showed that Fed policymakers want to notify investors “well in advance” of any plans to pull out bond purchases. This stance, analysts say, is likely motivated by a desire to avoid wrong markets or somehow repeat the ‘taper tantrum’ of 2013, when bond yields surged in response to the president’s unexpected signal from Fed Ben Bernanke indicating that the Fed could cut bonds buys.

The episode ultimately delayed the possible reduction in asset purchases by the Fed and a take-off in rates.

In recent weeks, bond yields have risen slightly, but not enough to worry Fed policymakers. Still, Cornerstone Macro economist Roberto Perli called the phenomenon a “mini” type tantrum, calling comments on cutting bond purchases “extremely unnecessary to the credibility of the new Fed executive.”

Fed Chairman Jerome Powell speaks on Thursday and may well “reinforce that message … reiterating the wide deviation from goals and a consistent approach to politics without early consideration of a political transition in response to de better budgetary prospects, “wrote Krishna Guha, vice president of Evercore ISI.

Still, if the government delivers a big budget package and vaccines continue to be rolled out successfully, Fed policymakers could issue a “firm downside signal” by the June meeting, the economist said. Jefferies Aneta Markowska – plenty of time to prepare the markets for a downturn. by the end of the year if necessary.