Fed Updates Plans for Bond Buying, But Makes No Changes to Asset Purchases

They pledged in September to support the economy’s recovery, providing new guidance that set a higher bar to raising interest rates. On Wednesday, they unveiled complementary language to clarify their intentions about bond purchases.

Since June, the Fed had been buying $80 billion in Treasurys and $40 billion in mortgage bonds per month and pledged to buy assets at least at that pace for “the coming months.”

The Fed updated that guidance in a policy statement released Wednesday after concluding a two-day meeting. The central bank will continue to increase its asset holdings at the current pace “until substantial further progress has been made toward” its employment and inflation goals.

With interest rates pinned near zero, the asset purchases have become the primary lever with which officials could dial up or down their stimulus.

In recent weeks, investors have focused on whether the Fed might change the composition of its holdings by buying more Treasury securities with longer-term yields in an effort to hold those yields down, as it did during bond-buying programs last decade.

Some analysts said such additional stimulus would provide extra insurance against the risks to the economy from rising coronavirus cases and business restrictions. They say it also would enhance any guidance around asset purchases and demonstrate the Fed’s commitment to seek periods of inflation above the central bank’s 2% objective.

Fed officials didn’t make those changes on Wednesday. In the run-up to the meeting, officials had instead highlighted the importance of fiscal policy in providing support to the economy before Covid-19 vaccines are broadly available. Long-term rates are already very low—considerably lower than they were during last decade’s bond-buying efforts.

That has supported rate-sensitive sectors of the economy like the housing market, but it also has left less scope for the Fed to spur more spending or investment by driving yields lower. In addition, broader financial conditions are easy, meaning many companies have ample access to additional borrowing—especially now that investors have turned more optimistic about the economy’s prospect once vaccinations accelerate.

Fed policy in the past decade has been guided by the theory that holding long-term securities stimulates financial markets and the economy by holding down long-term interest rates. That is thought to drive investors into riskier assets like stocks and corporate bonds and encourage business investment and consumer spending. Holding short-term securities, this theory holds, provides little stimulus.

Fed officials face a mixed economic outlook. For the next few months, risks to growth are rising amid an increase in Covid-19 cases, hospitalizations and deaths, which could lead to weaker economic activity.

Claims for unemployment benefits jumped last week, and the Commerce Department reported Wednesday that a measure of purchases at stores, restaurants and online dropped a seasonally adjusted 1.1% in November from the prior month.

(More to Come)

Write to Nick Timiraos at [email protected]