By Nick Timiraos
Federal Reserve officials debated how to clarify their plans for adding to their $7.4 trillion asset portfolio at their meeting last month amid an unusual economic outlook.
Minutes of the Dec. 15-16 Fed meeting, released Wednesday, also revealed the degree to which the policy makers had changed their economic outlook due to newly approved Covid-19 vaccines that might be widely available by the spring of 2021. Many had warned of a near-term slowdown in economic growth as cases and hospitalizations soared but suggested spending by Congress -- and not changes in Fed policy -- would be a better way to address any winter slump.
Fed officials slashed their short-term interest rate to near zero in March as the coronavirus pandemic disrupted financial markets and the economy. They also launched an array of emergency lending programs and began large-scale purchases of government debt and mortgage securities.
At last month's Fed meeting, officials updated their formal guidance around how long their $120 billion in monthly asset purchases would continue, complementing an earlier pledge in September that set a higher bar to raise interest rates.
The Fed has been buying $80 billion in Treasurys and $40 billion in mortgage bonds a month since June, and before the meeting had pledged to maintain those purchases "over coming months." The central bank updated that guidance at the meeting, stating the purchases would continue "until substantial further progress has been made" toward its broader employment and inflation goals.
Projections released last month showed most officials don't expect to reach those goals for years, leading them to hold interest rates near zero for at least three more years despite a somewhat more optimistic economic outlook.
With interest rates pinned near zero, the asset purchases have become the primary lever with which officials could dial up or down their stimulus.
The goal of the Fed's new guidance is to avoid the kind of market backlash that occurred in 2013, when then-Chairman Ben Bernanke suggested the central bank might soon taper its asset purchases. Investors thought the Fed was accelerating its plans to raise interest rates, sparking a sudden one-percentage-point jump in the 10-year Treasury yield that became known as the "taper tantrum."
At a news conference last month, Fed Chairman Jerome Powell said when the central bank is close to meeting its new benchmark of substantial progress, "we will say so, undoubtedly, well in advance of any time when we would actually consider gradually tapering the pace of purchases."
In the run-up to last month's meeting, some investors focused on whether the Fed might change the composition of its holdings by buying more Treasury securities with longer-term yields to hold those yields down, as it did during bond-buying programs last decade.
Mr. Powell said the Fed didn't think those charges were appropriate now because long-term rates are already very low, boosting sectors of the economy such as housing. "Interest-sensitive parts of the economy, they're performing well," he said. "The parts that are not performing well are not struggling from high interest rates. They're struggling from exposure to Covid."
Mr. Powell kept up a monthslong effort to suggest more spending by Congress would be a better way to address near-term deterioration from difficulties containing the pandemic. The prospect of widespread vaccinations by midyear meant that "the economy should be performing strongly" by the second half of 2021, he said.
In the week following last month's meeting, Congress agreed on a $900 billion virus-aid package that will extend unemployment benefits and provide new financial assistance to households, businesses and first-responders.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
01-06-21 1417ET
