After the Nov. 4 to 5 Federal Open Market Committee meeting, Federal Reserve Board Chair Jerome Powell noted the panel had discussed the asset purchases and would continue to monitor them going forward.
That statement attracted market watchers’ attention and it will be their focus as they pore over the FOMC minute from that meeting, which will be released Wednesday afternoon.
With rates at the effective lower bound, increased asset purchases will be the Fed’s main monetary policy easing tool going forward.
“The minutes will likely show that several members of the FOMC are worried that near-term risk to the economy has increased due to rising virus cases (as the meeting came before vaccine news), and as such there was increased discussion around altering bond buying programs to ensure financial conditions remain as accommodative as possible,” said Gautam Khanna, senior portfolio manager at Insight Investment. “The most obvious move would be an Operation Twist 2.0 where they focus their $80 billion/month purchases on the 10- to 30-year part of the curve.”
As such, he will be looking for “any insight/perspective” about changes to the program and the timing of such. “It will also be interesting to see if the FOMC reveals any criteria or factors that would lead to a change in the program,” Khanna said.
Going longer, he added, “could be thought of as insurance against potential deteriorating economic conditions and as a yield and curve shape cap should the Democrats win the Senate and/or a larger-than-expected fiscal package be announced with funding to come via UST issuance.”
While the last meeting occurred right after the elections, and the statement offered no new information, Gary Pzegeo, head of fixed income at CIBC Private Wealth Management, said, “Powell noted that the committee had a full discussion around the options of the asset purchase program. It will be interesting to see how the committee plans to use its balance sheet going forward and if those plans include an extension of duration.”
And while Treasury has told the Fed to end most of its emergency lending facilities by year-end, and “Powell noted the success of these programs at his press conference,” the minutes could show how the panel viewed “the facilities as a policy tool.”
Similarly, Steven Friedman, managing director of global fixed income at MacKay Shields LLC, said the release could “provide insights into how participants view the efficacy of different options for their asset purchases.”
Among the options he cited were: “explicitly tying the continuation of purchases to specific economic outcomes, changing the pace of monthly purchases, and extending the maturity of the purchases to remove more duration risk from the market.”
Also, the minutes could offer details about the “circumstances that would lead the Committee to ease further through balance sheet policy,” including gridlock over another stimulus package, or the rising number of coronavirus cases.
In data released Monday, the Federal Reserve Bank of Chicago’s National Activity Index rose to 0.83 in October from 0.32 in September, suggesting a pickup in growth, as three of the four components of the index were positive in the month.
The CFNAI-MA3, the three month moving average, dropped to 0.75 from 1.37 a month earlier, while the Diffusion Index, also a three-month moving average, dipped to 0.51 in October from 0.55 in September.
Production, employment, and sales, orders and inventories were all positive in October, while the personal consumption and housing component made a negative contribution in the month.