Fed weighed adjusting bond purchases to provide more help to subpar economy, meeting minutes show

  • The Federal Reserve released minutes from its November meeting during which it held interest rates steady.
  • Committee members held a lengthy discussion about the asset purchase program, suggesting possible changes ahead without indicating a firm date.
  • In addition to the interest rate and bond-buying discussions, members expressed concern about the pace of economic growth.

Federal Reserve officials took part in a detailed discussion about their asset purchase program during the meeting earlier this month, at which some members said they expect several changes to be enacted.

The Fed on Wednesday released minutes from its Nov. 4-5 policy meeting. Officials at that meeting voted to keep benchmark short-term borrowing rates anchored near zero.

Market participants were looking to the minutes to gauge where policymakers stand on possibly ramping up or adjusting the asset purchase program, which currently has the Fed buying $120 billion of Treasurys and mortgage-backed securities a month. The Fed could choose to increase the purchases or to lengthen the duration of those bonds.

While members said the current pace of purchases was helping keep financial conditions accommodative, they noted that changes could be enacted if necessary.

"Participants noted that the Committee could provide more accommodation, if appropriate, by increasing the pace of purchases or by shifting its Treasury purchases to those with a longer maturity without increasing the size of its purchases," the minutes said. "Alternatively, the Committee could provide more accommodation, if appropriate, by conducting purchases of the same pace and composition over a longer horizon."

Since the meeting, multiple Fed officials have disclosed that an involved discussion over the asset purchases took place at the meeting. An entire section of the minutes is devoted to those discussions.

Federal Open Market Committee officials also expressed concern about the pace of the economic recovery, noting that growth was still well off the pace before the coronavirus pandemic hit in March.

During his post-meeting news conference, Fed Chairman Jerome Powell said he feels the Fed still has plenty of policy "ammunition" and pledged that the committee is "strongly committed to using these powerful tools to support the economy."

Since then, the Fed has learned that it start 2021 without some of the weapons in its arsenal, as Treasury Secretary Steven Mnuchin has directed the central bank to return collateral funding it received for multiple pandemic-era lending programs. They include corporate bond purchases, loans to state and municipal governments and the Main Street Lending Program for small- and medium-sized businesses.

Members suggested that "over coming months" the Fed should provide more detail about what it will take to adjust the program, which has taken the central bank balance sheet past $7 trillion as part of efforts to support the economy through the coronavirus pandemic.

Officials favor an outcomes-based approach that would the purchases to achieving certain economic goals. The committee also noted that it would tie the purchases to interest rates, with the bond-buying program likely to wind down before rate hikes.

Market participants have been anticipating a possible Fed announcement at the December meeting.

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A 'blue wave' in U.S. elections could bring forward Fed rate hikes, says Morgan Stanley

  • A Democratic sweep in the coming U.S. elections will likely unleash more fiscal stimulus, said Jim Caron, a fixed income portfolio manager at Morgan Stanley Investment Management.
  • That could boost U.S. growth prospects beyond 2021, but could also cause the Federal Reserve to hike interest rates earlier than expected, said Caron.
  • Caron warned that a "blue wave" might not be all good for the U.S. economy.

A Democratic sweep in the coming U.S. elections will likely unleash more fiscal stimulus, but it could also cause the Federal Reserve to hike interest rates earlier than expected, said a Morgan Stanley portfolio manager.

The first rate hike by the Fed could be brought forward from around 2024-2025 to 2023-2024 — depending on how other policies, such as taxation, turn out in the event of a "blue wave," said Jim Caron, a senior member of Morgan Stanley Investment Management's global fixed income team.

A "blue wave" refers to an election outcome where Joe Biden defeats Donald Trump in the presidential race, and Democrats win a majority in both chambers of Congress.   

Caron told CNBC's "Squawk Box Asia" on Wednesday that the U.S. economy, under pressure from the coronavirus pandemic this year, was already expected to rebound in 2021. Additional stimulus that's likely to come with a "blue wave" would boost that growth potential further, he added.

"That means the growth impact could go into not just 2021, but also 2022," he said.

"The effect that this has though — that we need to be wary of — is that this could bring the first rate hike, nobody wants to talk about rate hikes right now, but this could bring the first rate hike by the Fed in from 2024 to 2025 to maybe 2023 to 2024," he explained.

The Fed has maintained its policy rate near zero since March and indicated that rates could stay at that level through 2023. That has kept Treasury yields low, even though they rose on Tuesday on a potential stimulus package ahead of the November elections.

But Caron warned that a Democratic win in the November elections might not be all good for the U.S. economy. He said there could be "more questions than answers" on issues such as the Democrats' tax policy and their approach toward regulation, which could create uncertainties.

Many investors fear that a Biden win could result in higher taxes and tighter regulations — which could lead to lower corporate profits and less economic growth.

"I think the markets are being a little bit complacent about, just thinking that: 'Well on Nov. 3, the day of the election, we're going to get all the answers and everything's going to be great going forward'," said Caron.

"I actually think there's going to be more questions than answers after the election than there is right now."

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