The Federal Reserve will do everything it can to avoid a rage when it finally decides to cut its bond purchases, it was shown Wednesday at the most recent central bank meeting.
After a two-day session between December 15 and 16, the Federal Open Market Committee on political decision-making voted to keep its short-term benchmark interest rate anchored to zero.
Markets, however, focused on the discussion about the Fed’s asset purchase program. The central bank has bought at least $ 120 billion in mortgages and mortgage-backed securities each month, and at the meeting pledged to continue to do so until it sees “substantial progress” toward its targets. inflation and employment.
The minutes noted unanimous approval of the program’s “results-based” approach, although members noted that this does not mean that purchases are tied to specific numerical goals.
Officials agreed that markets would receive a lot of notice before asset purchases were limited. The last time the Fed cut its asset purchases, it sparked a “rage” in the market that officials want to avoid this time around.
“Several participants noted the importance of the Committee clearly communicating its assessment of actual and expected progress towards its long-term goals well in advance of the time when it would be considered substantial enough to justify a change in the pace of procurement.” dit.
Members further noted that once the “substantial progress” threshold is reached, the reduction in purchases would be “gradual” and in line with what the Fed did from 2013. During the previous reduction in purchases, the Fed reduced how much it bought each month. Subsequently, it allowed a limit amount of bond income that he still kept rolling each month while reinvesting the rest.
There was some foresight that the committee could speed up the pace of purchases or extend the duration of the bonds. This latest move would be an effort to stimulate the economy by reducing long-term interest rates.
While markets monitored the amount of favor that committee members had to adjust the duration of purchases, the minutes noted that only “a couple” of officials indicated they were “open” to the idea. to buy bonds with a longer date.
Also at the meeting, members adjusted their financial estimates for the coming years. Overall, the committee grew less pessimistic about economic growth than in September and lowered its projections on the unemployment rate.
Officials noted that economic data around the meeting was mostly better than expected, but accelerating the spread of Covid-19 was a challenge and overall growth remained well below its pre-meeting level. pandemic.
“They noted that the economic recovery so far had been stronger than expected, suggesting a greater boost in economic activity than previously thought, but saw the latest indicators as signals that the pace of recovery had slowed, ”the minutes read. “With the worsening pandemic across the country, expansion was expected to slow further further in the coming months.”
There has been virtually no change in the post-meeting statement from the previous meeting, except for the language on asset purchase.