Fed Saw Bond-Buying Program Providing ‘Very Significant’ Support

“Participants generally judged that the asset purchase program as structured was providing very significant policy accommodation,” according to the minutes, which were released Wednesday.

The minutes also indicated that many officials were nervous about the potential for growth to stall in the winter amid a surge in Covid-19 cases and hospitalizations. But they also thought newly approved vaccines had reduced the chance of worse-than-anticipated economic outcomes later in 2021.

“A number of participants saw risks to economic activity as more balanced than earlier,” the minutes said.

For the first time since the pandemic reached the U.S. last March, officials at last month’s meeting discussed the possibility that economic growth could accelerate faster than then expected. That scenario included wider-scale vaccinations releasing pent-up demand as social-distancing measures eased sooner than previously anticipated—which, in turn, could allow displaced workers to return to jobs sooner.

Still, the minutes showed officials were in no hurry to reduce their support for the economy. They expressed concern that permanent layoffs, as opposed to temporary furloughs, had been rising. Because it traditionally takes longer for workers who lose jobs permanently to find new ones, officials worried that better-than-expected economic growth wouldn’t necessarily yield equivalent improvements in labor-market conditions.

Besides of the grim public-health situation, officials cited concerns about several possibilities that were subsequently avoided in the weeks after the meeting. Those included the prospect that Congress wouldn’t agree on another virus-aid bill or that the U.K. and the European Union wouldn’t successfully conclude trade negotiations. Congress approved a $900 billion aid package later in December, and a new U.K.-EU trade deal was secured and came into force on Jan. 1.

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 asset purchases would continue, complementing a 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 monthly since June. Until last month, the Fed had pledged to maintain those purchases “over coming months.” The central bank updated that guidance at the December meeting, stating the purchases would continue “until substantial further progress has been made” toward its broader employment and inflation goals.

This judgment would be “broad, qualitative and not based on specific numerical criteria or thresholds,” the minutes said.

The minutes also said all 17 Fed officials at the meeting supported the new guidance, which they believed “underscored the responsiveness of balance-sheet policy to unanticipated economic developments.”

Projections released last month showed most officials don’t expect to reach their employment and inflation goals for years, leading them to hold interest rates near zero for at least three more years despite a somewhat more optimistic economic outlook.

The minutes said the new guidance reflected officials’ intentions to commit to a longer period of near-zero rates and a larger asset portfolio if it took more time for the economy to recover from the downturn.

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.”

Several officials thought that once the Fed decided to begin reducing the pace of its asset purchases, it could follow the same sequence that occurred in 2013; it slowly reduced the pace of purchases for around a year before phasing them out.

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.

The minutes showed only two officials were open to making such a change, though officials said they could consider those adjustments later.

Mr. Powell said last month the Fed didn’t think such charges were appropriate 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.”

Write to Nick Timiraos at [email protected]