Clarida signals possible changes to the Fed's bond purchase program

Clarida signals possible changes to the Fed’s bond purchase program

Richard Clarida, vice chairman of the Federal Reserve, pointed to possible changes to the US Federal Reserve’s bond-buying program to seek ways to sustain the recovery in the world’s largest economy.

“The Federal Reserve is committed to using all available tools – not just the federal funds rate and forward guidance, but also large asset purchases – to achieve our dual mandate goal,” Clarida said in a note to the Hutchins Center for Taxation and Monetary Policy at the Brookings Institution.

The word “all” was highlighted in his prepared notes posted on the Fed’s website.

Mr Clarida noted that the Fed’s bond purchases – which had spiked at the start of the pandemic – were already “heavily assisting” the recovery and that this “crucial role” was discussed at the central bank’s policy meeting in early November.

“Looking ahead, we will continue to monitor and evaluate how our ongoing asset purchases can best support our maximum employment and price stability goals,” added Clarida.

The focus is on asset purchases as the Fed explores additional measures to support the U.S. economy, which, with limited help from fiscal policy, is facing a surge in coronavirus cases.

The Fed made a very reluctant pledge in September to keep its prime rate near zero until the economy hits full employment and inflation is at 2 percent and is on track to beat it for some time.

The Fed is currently buying Treasury bills at a rate of $ 80 billion per month across all maturities. In September it said the goal of asset purchases is not only to improve the way the market works, but also to support economic recovery.

Since then, investors have repeatedly asked for more clarity about the future of the program.

Options the Fed might consider include increasing the total amount of bonds purchased or changing to focus its firepower on long-term stocks to counter a recent spike in borrowing costs.

Yields on government bonds, which are rising as prices have fallen, have risen in recent weeks as investors move beyond the current surge in Covid-19 cases and new restrictions on business and social activities to the prospect of an end to the pandemic Using vaccines have looked out.

The return on the 10-year benchmark note rose to 0.97 percent at one point last week, though it has since fallen to 0.9 percent. Some investors believe it could break 1 percent in the short term.

In light of the increase in coronavirus cases worldwide, Michael Feroli, chief US economist at JPMorgan, wrote on Monday that the Fed could adjust its asset purchases as early as its December meeting.

“As markets focus more on the medium-term outlook, where vaccine hopes rise, recent Fed rhetoric has pointed to growing concerns over the months between now and a vaccine’s spread,” he said.