By Howard Schneider
WASHINGTON (Reuters) - The possible arrival of a coronavirus vaccine in the coming weeks means the Federal Reserve may soon have to lay out its plans for helping the economy navigate the potentially choppy transition to a post-pandemic world.
At issue for the U.S. central bank is how to manage the switch from crisis policies meant to keep everyone afloat to a changed economy where firms and families may struggle to adapt and a new run of business failures may be unavoidable.
Two recent developments have accelerated the onset of that next stage of the Fed's debate: U.S. Treasury Secretary Steven Mnuchin's surprise decision last week to end several of the central bank's emergency programs at the end of next month and recent progress toward a coronavirus vaccine.
The changing landscape may prompt Fed policymakers at their Dec. 15-16 meeting to describe in more detail their plans for the coming months.
It likely means firmer promises about the pace and type of government bond purchases, or quantitative easing, that the Fed will use to keep borrowing costs low, analysts said. That would serve as some substitute for the more targeted emergency programs that are lapsing next month, and also prepare the ground for the arrival of a vaccine, a development likely to push market interest rates higher as confidence returns and the outlook improves.
Even on its own, Mnuchin's decision to let several Fed emergency programs expire next month "will tighten financial conditions ... at the wrong moment," said Krishna Guha, vice president of Evercore ISI. "One side-effect is that it increases the likelihood that the (Federal Open Market Committee) will strengthen QE in December," he said, referring to the Fed's policy-setting committee.
QE AS MAIN LEVER
Options on that front include changing the mix of government bonds that the Fed buys each month, increasing the current $120 billion in bonds being purchased, or both.
With the looming end of the crisis programs, purchases of government bonds are now the main lever the Fed can pull to change credit conditions. The purchases are thought to hold down broader borrowing costs through a number of channels, encouraging families and businesses to finance large purchases like homes and cars, and supporting stock and other asset prices influenced by interest rates on government bonds.
The emergency programs were more tailored, designed for example to ensure corporations could sell private bonds to raise money at reasonable rates, that cities and states had operating cash, and even allowing small businesses to get loans financed mostly by the Fed.