The Fed supported early warning before changing bond purchases

Federal Reserve officials last month supported providing early warning before the central bank made changes to its $ 120 billion in monthly bond purchases.

The 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 substantial progress” is made towards the price stability and maximum employment goals of the Fed. central bank.

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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 purchases. The central bank is making monthly bond purchases to provide more aid to an economy struggling to emerge from a recession induced by the coronavirus pandemic, which has caused the loss of millions of jobs.

The Fed’s move appears to be aimed at avoiding a premature increase in borrowing costs, triggered by the market, which could raise interest rates on mortgages, auto loans and other lending activities for consumers and businesses.

The minutes note that several Fed policymakers emphasized that any changes in the size of purchases should only be made after the Fed had “clearly communicated” its change in the assessment of the economic situation “well before” when it planned to change the pace or size of securities purchases.

Monthly purchases, consisting of $ 80 billion in Treasury bills and $ 40 billion in mortgage-backed bonds, aim to push down long-term interest rates. This at a time when the Fed cut its main short-term interest rate to a record low of zero to 0.25% and indicated that it planned to keep the rate as low at least until the end of 2023.

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The emphasis on clear communications goes back to one of the Fed’s worst communication mistakes. In 2013, then President Ben Bernanke suggested that the Fed could start reducing its purchases of bonds that were being made to pressure interest rates to drive a recovery. after the 2008 financial crisis.

Bernanke’s statement took the markets by surprise and caused an immediate jump in bond yields. Fed officials had to rush to assure investors that no immediate reduction in bond purchases was planned. The incident came to be called a “tantrum”.

The minutes of the Fed’s December discussion, released on Wednesday after the usual three-week delay, did not detail what would constitute “substantial additional progress” in meeting the central bank’s economic goals. The minutes state that the authorities believe that any changes in securities purchases will not be based on “specific numerical criteria or limits”.

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The Fed’s next meeting is on January 26 and 27 and analysts believe it will drop its benchmark rate to the ultra-low level it has been in since last March, with bond purchases continuing at the same pace as they are now.

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

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Several Fed officials have warned that the winter months may see a slowdown in activity because of an increase in coronavirus cases, with more government assistance likely to be needed. Congress last month approved a $ 900 billion aid package and President-elect Joe Biden said he would push for more assistance after taking office on January 20.

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