Federal Reserve officials will meet immediately after the US election to react quickly to the market turmoil in the vote and to discuss the impact of new coronavirus cases on the recovery.
Investors and policymakers are likely to digest the outcome of the White House race as the Federal Open Market Committee holds its regular meeting on Wednesday and Thursday.
While the Fed is very reluctant to comment on policy developments, economists say the US Federal Reserve would consider shoring up financial markets if a controversial or uncertain outcome caused serious disruption.
“The Fed will want to keep its head bowed and focus on the economy, not politics. . .[but]When the market is volatile, they will certainly be ready to provide liquidity to keep the market running, ”said Randall Kroszner, a former Fed governor who is now the deputy dean of the University of Chicago Business School.
Krishna Guha and Ernie Tedeschi, economists at Evercore ISI, said in a statement to clients that the Fed was prepared to deliver “surge” asset purchases to address any post-election disruption on the US treasury and mortgage-backed assets “Curb” securities markets of this kind that happened in March. They said the Fed could also potentially step up corporate debt purchases if needed.
“We believe the Fed will distinguish between the emergency response that may be required in the event of a political crisis that leads to dislocation in financial markets, continued support for credit markets and the development of its ongoing monetary policy,” wrote Guha and Tedeschi.
If there is some uncertainty about the election result, [Mr Powell] must be very forward-looking in terms of securing the market
Economists do not expect any major monetary policy changes at the FOMC this week. At its last meeting, the Fed approved new interest rate guidelines that cemented its loose monetary policy until the US economy reached full employment and much higher inflation – conditions that could take years to meet.
While the U.S. economy has recovered faster than expected in recent months, Fed officials remain deeply concerned about the impact of the recent surge in coronavirus and hospital admissions cases – as well as that. Lack of additional fiscal stimulus from Washington.
Even if they take no further action this week, US central bankers are expected to continue discussions about clarity on their asset purchases. Given the steady sell-off of long-standing government bonds in recent years, this issue has gained months of urgency and increased expectations for more supply in the market.
The 10-year benchmark yield on government bonds is now at its highest level since June, after rising from below 0.7 percent to 0.85 percent in early September. Meanwhile, the yield on the ultra-long 30-year bond has risen 0.2 percentage points to 1.62 percent over the same period.
Recently, the Fed has been buying treasury bills of all maturities at about $ 80 billion per month. However, to insure against a destabilizing spike in borrowing costs that could accelerate the economic recovery, some market participants believe that the Fed will soon have to focus most of its bond purchases on longer-term debt or increase the overall size of its purchases.
While the majority of Treasury auctions went smoothly, a handful of disappointing results have kept investors aware of the market’s ability to raise record-sized blocks of debt.
“With each passing month, there is more time in market and more indigestion,” said Marvin Loh, senior global markets strategist for State Street Global Markets. “You need to start putting in place policies that support your new longer-term goals.”
Diana Amoa, fixed income portfolio manager at JPMorgan Asset Management, said the Fed is likely to hold back this policy change until there is clarity about the election result and the extent of the fiscal stimulus ahead. But if the financial markets or the economy takes a sharp turn for the worst, it may need to act sooner.
“If the data worsens or if a recession breaks out that aggressively aggravates financial conditions, they may be forced to be more aggressive,” she said.
The US election results could also have a significant impact on the central bank itself. For example, it is unclear whether Joe Biden, the Democratic candidate, would try to keep Jay Powell in his post as Fed chair if he wins.
At this week’s FOMC, however, the Fed is unlikely to offer much policy response other than using its tools to keep markets stable if necessary.
“If there is some uncertainty about the outcome of the election, [Mr Powell] needs to be very forward-looking when it comes to hedging the market, ”said Peter Tchir, Head of Macro Strategy at Academy Securities. “When we have more clarity, he will focus on the limits of monetary policy and the need for fiscal policy.”