Federal Reserve policymakers have honed their messaging for the new year—no monetary policy changes in 2021 regardless of COVID-19 vaccines and the prospect of economic recovery in the second half.
Members of the Federal Open Market Committee were at pains to stick to the updated guidance from their December meeting, linking monetary accommodation not to a timeline but to “substantial further progress” in the Fed’s twin goals of monetary stability and maximum employment.
The minutes of the December meeting, released Wednesday, underscored this determination.
“All participants supported enhancing the committee's guidance on asset purchases at this meeting and, in particular, adopting qualitative, outcome-based guidance indicating that increases in asset holdings would continue,” the minutes recorded.
FOMC members welcomed the rollout of a vaccine, but were cautious about how quickly the economy could recover.
“Participants saw significant uncertainties regarding how quickly the deployment of vaccines would proceed,” the minutes say, adding, “participants cited several downside risks that could threaten the economic recovery.”
Chicago Fed President Charles Evans, who is moderately dovish on interest rates, reassured market participants that the Fed was not about to tighten its easy monetary policy despite the prospect of vaccines bringing the virus under control.
“To meet our objectives and manage risks, the Fed’s policy stance will have to be accommodative for quite a while,” Evans said in a virtual address to the Allied Social Sciences Associations on Monday.
“Economic agents should be prepared for a period of very low interest rates and an expansion of our balance sheet as we work to achieve both our dual mandate objectives.”
Even the moderately hawkish Loretta Mester, head of the Cleveland Fed, is on board. She told journalists on Tuesday that it was unlikely the Fed would alter its pace of monthly bond purchases—currently running at $80 billion in Treasuries and $40 billion in mortgage securities—even if the economy improves in the second half.
“I’m happy with the way policy is calibrated right now,” Mester said. “If things work out the way I hope they worked out, I would like us to be able to taper asset purchases next year.” She said she doubts they would meet the Fed’s economic goals this year.
Evans and Mester alternate voting positions, taking turns every other year (most other regional bank chiefs only get to vote every third year). Evans will rotate into a voting position starting at the meeting Jan. 26-27.
Atlanta Fed chief Raphael Bostic, by contrast, seemed a bit outside this consensus. In an interview published Monday, he was more optimistic about the economy and hopeful of recalibrating the asset purchase amount “in fairly short order.” For him, post-vaccine dynamics could prompt policymakers to begin talking about scaling back the purchases relatively soon.
There had been speculation ahead of the December meeting that the Fed would increase its asset purchases or tilt them to longer maturities. But the minutes indicate that option was not really on the table. “All participants judged that it would be appropriate to continue those purchases at least at the current pace, and nearly all favored maintaining the current composition of purchases,” the minutes said.
Meanwhile, disclosures that former Fed chair Janet Yellen made $7.2 million in the past two years in fees for speeches to banks and other companies— including nearly $1 million from Citigroup alone—are raising concerns regarding her nomination to be Treasury secretary in the Biden administration with perceptions she is too close to Wall Street.
Also, President Donald Trump renominated economist Judy Shelton for a vacant seat on the Fed’s Board of Governors on the first day of the new Congress Sunday, after her nomination expired with the end of the previous Congress without ever getting a floor vote in the Senate. It is conceivable the Senate could confirm the nomination before President-elect Joe Biden takes office January 20, but unlikely given the previous opposition of some Republicans.