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Fed Discussed Options to Adjust QE, More Details Probably Out Next Month

As widely anticipated, the Fed left the policy rate unchanged at 0-0.25% and asset purchases at US$120B per month. The decisions were made unanimously. The members acknowledged that economic recovery remained under way. Yet, they warned of the downside risks to growth amidst the huge uncertainty of the coronavirus pandemic. The members pledged to use the “full range of tools to support the U.S. economy in this challenging time”.

There were only small tweaks in the policy statement. On the economic developments, the Fed reiterated that the pandemic is “causing tremendous human and economic hardship across the United States and around the world”. It noted that “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year”. This is compared with “economic activity and employment have picked up …” suggested in September. The member noted that “overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses”. In September, policymakers indicated that “
Overall financial conditions have improved…”.

The monetary policy stance remains unchanged. Policymakers at the meeting discussed a number of options for its asset purchase program. These include shifting “the composition, the duration, the size, and the life cycle of the program”. We expect the central bank to provide more details at the December meeting, such as a timeline for asset purchases. As Chair Jerome Powell suggested in the press conference, the Fed “understands the ways in which we can adjust the parameters of it to deliver more accommodation if it turns out to be appropriate” but currently, “this very large, effective program is delivering about the right amount of accommodation and support for the markets”. He, however, pledged that the Fed is ready to increase monetary policy support “if risks emerge that could impede the attainment of the Committee’s goals” of maximum employment and price stability”. The Fed made no indication about increasing the average maturity of the assets as some had anticipated before the meeting. However, this will likely be the case if the Fed needs to increase stimulus through QE, as negative interest rates are ruled out.

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Meanwhile, there will be two changes to the updates of economic projections. The Fed will now release the entire projections at the same time as the FOMC statement is released, including the full distribution of participant forecasts that was previously released in the minutes. The contents of the projections will be enriched, including 2 new graphs that show how participants’ assessments of the level of uncertainty and the balance of risks have evolved over time.

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