U.S. Fed expected to offer new guidance on asset purchases this week amid COVID-19 resurgence
Source: Xinhua | 2020-12-16
The U.S. Federal Reserve is expected to offer new guidance for its asset purchase program this week as the rise in COVID-19 cases across the county poses challenges to the fragile economic recovery, economists have said.
The Federal Open Market Committee (FOMC), the Fed's policy-making committee, is expected to "provide guidance regarding what might prompt it to further expand" the Fed's asset purchase program after concluding its two-day policy meeting on Wednesday, Diane Swonk, chief economist at Grant Thornton, a major accounting firm, wrote Sunday in an analysis.
"Officials will only increase asset purchases if credit markets hit another roadblock and begin to seize; also, they are likely to signal they will keep those purchases in place until the economy is well beyond the current crisis," Swonk wrote, adding the Fed has been united in the view that no additional purchases are needed at the moment.
"The Fed will most likely place some guidance around the asset purchase program but decline to make changes to the program at this time," echoed Tim Duy, professor of the University of Oregon and a long-time Fed watcher.
"I believe they will view the current Covid-19 surge as akin to a natural disaster where the most significant impacts occur in a time horizon in which they have little influence," Duy wrote Monday in a blog post, noting Fed officials' comments in recent weeks suggest an inclination to delay changing the asset purchase program until next spring.
However, the breakdown in COVID-19 relief negotiations could threaten to roil financial markets and force the Fed to act sooner, according to Swonk.
"Much will depend upon whether Congress can come to a deal on additional fiscal relief before the year-end," Swonk said, adding risks will remain to the downside in the near term.
"The fear is that the recovery could stall or worse over the next several months. The surge in cases and hospitalizations is overwhelming the health care system," she said.
Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP, believed that the Fed's new guidance will link policy to the evolution of the pandemic and its impact on economic activity.
"We think that the committee will commit to asset purchases for the duration of the pandemic, which should keep market expectations aligned with policy intentions," Brusuelas wrote Monday in an analysis, adding the economy is facing a difficult period through the first quarter of 2021.
"Perhaps more important, given the continuing distress in the labor market, the case is strong for the extension in the maturity of asset purchases to dampen rates at the end of the curve," Brusuelas argued.
A slight majority of the 47 economists surveyed by Bloomberg News in early December also said they expected the new guidance will be approved at the Fed's policy meeting this week, while most of the remaining economists expect it in January or March.
The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of U.S. treasuries and agency mortgage-backed securities to repair financial markets.
The Fed last month decided to keep its benchmark interest rate unchanged at the record-low level of near zero while continuing its asset purchase program at the current pace of 120 billion U.S. dollars per month.
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