Analysis: With economy and credit rolling along, Fed unlikely to alter bond-buying

In this news, we discuss the Analysis: With economy and credit rolling along, Fed unlikely to alter bond-buying.

WASHINGTON (Reuters) – Homes are being built and sold across the United States. The cars are moving. Businesses fundraise, and general financial terms remain easy.

Expectations were high in September that the US Federal Reserve, as it implemented a new approach to monetary policy and continued to fight the recession, would step up its bond purchases to further stimulate the economy. But the economy has stubbornly sent a different signal: stable over time.

The job market is recovering jobs every month, but at a slower pace, while other data continues to surprise positively. Retail sales in the United States in September, for example, were up 1.9% from the previous month, and at nearly $ 550 billion, they are 3.7% above levels before. pandemic, the kind of outcome that might make the US central bank hesitate to tinker with its $ 120 billion monthly purchases of government bonds and mortgage-backed securities (MBS).

Chart: The Fed’s QE bailout

With stable financial markets and readily available credit, people and businesses are “buying homes, buying cars, and ordering equipment and software,” Fed Vice President Richard Clarida said this week, checking some of the deals that easy monetary policy traditionally expects to encourage, and that the Fed would be concerned about if it failed.

Chart: Financial conditions tightened, then eased

“Right now we have good policy in place,” St. Louis Fed Chairman James Bullard said on Friday during a panel on the sidelines of the annual meetings of the International Monetary Fund and the Bank. global. “We have our (quantitative easing) program in a place with a substantial amount of buying. I think it is appropriate.

Interest rates on US Treasuries remain at historically low levels, pushing down related types of credit, including 30-year mortgages.

Chart: interest rates down

More broadly, even with the outcome of the coronavirus pandemic in doubt and millions of workers sidelined by the crisis, Bullard and other Fed officials have revalued their economic forecasts in recent weeks. Closely watched indicators in credit markets and inflation expectations are at least holding up or even improving.

Chart: Cheap credit fuels partial rebound


If the economy in the spring seemed to be tipping into the worst outcome set – a more lasting recession followed by rounds of defaults and a subsequent financial crisis – it has landed on the path to recovery.

“With an economy clearly on track, the (Federal Open Market Committee) will not take any further significant policy action unless something bad happens,” William Nelson, former Fed official who is now chief economist at the Bank Policy Institute, wrote this month, referring to the Fed’s policy-making committee.

This “something” could well happen.

Fed officials have been adamant about the risks of an ongoing pandemic, including declining household incomes due to the expiration of unemployment insurance benefits or other developments that derail the recovery.

The Fed’s asset purchases aim to support the economy in a number of ways. By increasing the demand for riskier bonds, for example, they maintain various related interest rates and make borrowing less expensive. They often increase the prices of stocks and other assets, generating a “wealth effect” that triggers spin-off economic activity.

A leading Fed economist recently estimated that the Fed would need to purchase an additional $ 3.5 trillion in securities to offset the impact of the pandemic and the recession it triggered. Others argued that more was needed to prove the central bank was serious about hitting its 2% inflation target.

But the Fed has bought about $ 3 trillion in Treasuries and MBS since the onset of the recession and locked itself into an unlimited promise to continue buying at least $ 120 billion more each month, at a faster pace. faster than that used to combat the financial crisis of 2007-2009. and the recession. In its latest policy statement, the Fed said that this amount is already helping to maintain the “accommodative” financial conditions it had promised to maintain indefinitely.

The economy is by no means healed from the shock it suffered in March and April, when lockdowns to control the spread of the virus were imposed. Initial unemployment insurance claims returned to nearly 900,000 in the week ending October 10, and although he hailed a stronger-than-expected recovery this week, Clarida acknowledged that there remained a deep notch, especially for unemployed or marginalized workers.

But of the two big levers used to manage the U.S. economy – monetary conditions controlled by the Fed and government spending controlled by Congress – Fed officials feel they are doing what they can to help it. instant.

At this point, Fed officials have noted that the need is to put money directly into the pockets of the unemployed who have to make mortgage payments, businesses waiting for customers to return, or local governments who have to pay the mortgage payments. workers.

Buying bonds won’t do that.

“We expect the recovery to continue in the coming months, albeit at a more modest pace, and we do not expect Fed officials to see the need to provide additional accommodation,” Goldman economists wrote. Sachs in an analysis this week.

Even if things turn out badly, in an environment of already low interest rates and weak household demand, changes in the Fed’s asset purchases are “not a particularly effective response.”

Reporting by Howard Schneider; Additional reporting by Ann Saphir; Editing by Dan Burns and Paul Simao

Original © Thomson Reuters

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