The Federal Reserve will do what it can to prevent a fit of anger when it finally decides to cut its bond purchases, the minutes of the most recent central bank meeting showed on Wednesday.
After a two-day session, from 15 to 16 December, the Federal Policy Market Open Committee voted to keep its benchmark short-term interest rate anchored close to zero.
The markets, however, were focused on the discussion around the Fed’s asset purchase program. The central bank has been buying at least $ 120 billion in Treasury bills and mortgage-backed bonds every month, and at the meeting promised to keep doing this until you see “substantial progress” towards your inflation and employment goals.
The minutes registered unanimous approval around the program’s “results-based” approach, although members noted that this does not mean that purchases will be linked to specific numerical targets.
The authorities agreed that markets would receive ample notice before asset purchases were reduced. The last time the Fed cut its asset purchases, it unleashed a “rage attack” on the market that officials want to avoid this time.
“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 when it would be considered substantial enough to justify a change in the pace of purchases,” he says. the minutes said.
Members further noted that once the “substantial additional progress” threshold has been reached, the reduction in purchases would be “gradual” and in line with what the Fed has done since 2013. During the previous reduction in purchases, the Fed cut how much it was buying each month. It subsequently allowed a limited amount of proceeds from the securities it was still holding to roll over each month, while reinvesting the rest.
There was some expectation that the committee could accelerate the pace of purchases or extend the duration of the bonds. The last move would be an effort to stimulate the economy by reducing long-term interest rates.
Although the markets were looking at how much favor the committee members would have to adjust the duration of purchases, the minutes noted that only “a few” employees indicated that they were “open” to the idea of buying longer-term securities.
Also at the meeting, members adjusted their economic estimates for the coming years. Overall, the committee was less pessimistic about economic growth than it was in September and reduced its projections for the unemployment rate.
The authorities noted that economic data at the time of the meeting was mostly better than expected, but the accelerated spread of Covid-19 was posing a challenge and overall growth remained considerably below the pre-pandemic level.
“They noted that the economic recovery so far has been stronger than anticipated – suggesting greater momentum in economic activity than previously thought – but they saw the latest indicators as a sign that the pace of recovery has slowed,” the minutes said. . “With the pandemic worsening across the country, expansion was expected to slow further in the coming months.”
There was virtually no change in the post-meeting statement from the previous meeting, except for the language on asset purchases.