- The minutes from the December 15-16 Federal Open Market Committee (FOMC) meetings highlighted participants’ commitment to enhanced transparency and outcome-based forward guidance.
- This new guidance focuses on the Quantitative Easing (QE) program, whereby the Fed is committed to purchasing at least $80 billion Treasuries and $40 billion agency mortgage-back securities per month. The committee will maintain purchases at this level “until substantial further progress has been made toward reaching the Committee’s maximum employment and price stability goals.”
- Other than the changes to forward guidance, the overall tone of the meetings was one of caution, noting that the economy is “still far from having attained conditions consistent with the Committee’s dual mandate.” Members also noted that “with the pandemic worsening across the country, the expansion was expected to slow even further in coming months.”
Key Implications
- The clarity on the Fed’s QE program is welcome. This Fed support will become increasingly more important as the economic recovery becomes further entrenched over the coming months. Treasury yields have risen recently on the back of an improved economic outlook and greater fiscal stimulus. The former brings forward pricing for the Fed’s policy rate, whereas the latter increases the supply of Treasury debt that is expected to hit the market. By continuing QE in a clear and calculated way, the Fed will lean against this upward pressure on yields and give the economy additional running room to recover.
- The Fed keeping its foot on the gas is good news for financial markets and risk assets in general. The Fed is not taking any chances with the economic recovery. It would rather risk overheating the economic engine than lift its foot off the gas too early.
