(Reuters) – Despite optimism over vaccinations and the prospect of further fiscal stimulus under the incoming Biden administration, the Federal Reserve is adhering to the extremely easy monetary policy, policymakers made clear Wednesday.
“The economy is a long way from our employment and inflation targets,” Governor Fed Lael Brainard told the Canadian Business Economy Association. “With my basic vision, I expect the pace of buying at this point will be appropriate for a long time.”
The Fed is adding mortgage-backed finances and securities to its balance sheet at a rate of $ 120 billion per month, and has pledged to continue to do so until it sees “further substantial progress” towards full goals. employment and inflation 2%.
“Even under an optimistic outlook, it will take time to achieve further significant improvements,” said Brainard, adding that the purchases are supporting the recovery and “we are ready to increase these amounts. if we think that he deserves it. ”
St. Louis Fed President James Bullard said while the labor market has improved significantly, there was still a long way to go.
“Some departments have been hit hard and for them to come back we need to implement this vaccine,” Bullard said in an interview at a Reuters Next conference. For the economy as a whole, “you can get a boost … but let’s wait to see if that happens.”
The comments could reset expectations among bond market participants and investors who, in recent days have been increasing bets that the central bank could bind a purchase before the year outside.
They have done so in part because the election of two Democratic senators last week from Georgia takes control of the incoming Biden administration’s party over both the Senate and the House of Commons. Representatives.
Economists at JP Morgan say that sets the stage for a new $ 900 billion stimulus package in the coming months, in addition to the $ 892 billion package that passed last month. The extra money for homes, businesses and others strengthens the numbers that the economy will meet the Fed’s “major positive progress” bar, allowing the taper to start “before the end of the year , ”They wrote last week.
Expectations for the taper also got steam after Atlanta Fed President Raphael Bostic and Dallas Fed President Robert Kaplan said in the past few days that they expect an economic boost later this year. could allow the Fed to start reducing purchases.
NOW THAT’S NOT THE WAY
Analysts said this was not yet the right time to establish the platform for withdrawal in asset purchases.
“I think it’s just a mistake” to start pointing taper already, said Joe Gagnon, a senior at the Peterson International Institute of Economics and a former Fed economist at Fed.
A new pandemic aid package could boost the economic outlook, he said, and “it’s not unreasonable to start thinking internally about this – but I don’t know what the urgency is. it is to speak publicly about it. ”
The minutes of last month’s policy meeting showed that Fed policymakers want to inform investors “long in advance” of any plans to start withdrawing bond purchases. That position, analysts say, is likely to be motivated by a desire to avoid steep markets or in any way repeat the “taper tantrum” in 2013, when bond yields came introduced in response to an unexpected sign from Fed Chairman Ben Bernanke that the Fed could make a connection. buying.
The program eventually delayed Fed’s final decline on asset purchases and rate hikes.
In the last few weeks bond yields have skyrocketed, although not enough to worry Fed policymakers. However, Macro Cornerstone economist Roberto Perli described the phenomenon as a “mini taper tantrum”, shouting out comments at reducing bond purchases “very unhelpful to the Fed’s new framework credibility. ”
Fed Chairman Jerome Powell will speak on Thursday and may be “reaffirming this message … reiterating the big gap to goals and a sustainable approach as it goes unchecked. early on policy transition in response to better fiscal expectations, ”wrote Evercore ISI vice-chairman Krishna Guha.
However, if the government delivers a major fiscal package and vaccines are still being successfully distributed, Fed policymakers could deliver a “firm taper signal” ahead of the June meeting, Jefferies economist Aneta Markowska said – time to enough to prepare markets for taper. before the end of the year if necessary.
Reporting by Howard Schneider and Ann Saphir; Edited by Andrea Ricci