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FOMC preview: How much Fedspeak is too much on quantitative easing?

Brian Cheung · Anchor/Reporter
6 min read

In This Article:

Federal Reserve Chairman Jerome Powell faces a tough question when he approaches the podium on Wednesday: is it a better strategy to provide more or less communication on the Fed’s asset purchase program?

On interest rate policy, the Fed is expected to hold rates at near-zero as the economic focus shifts to the vaccine rollout and President Joe Biden’s efforts on further stimulus.

“We expect little news from the FOMC meeting, with the FOMC hesitant to show much pessimism about current growth or too much optimism about the impacts of vaccines or additional fiscal policy,” UBS Global Research wrote in a Jan. 22 note.

With few expected changes to the policy statement, Fed watchers will be fixated on any commentary from Powell on the future of asset purchases under the so-called quantitative easing program.

The Fed’s latest guidance, from its December policy-setting meeting, committed to buying at least $120 billion a month in U.S. Treasuries and agency mortgage-backed securities until “substantial further progress” is made on the recovery.

But the Fed has not defined what would constitute “substantial further progress,” and Grant Thornton Chief Economist Diane Swonk wrote on Jan. 24 that a lack of clarification is the reason for why longer-term borrowing costs have increased over the course of January.

“Market participants are bracing for what could be a surprise slowdown in the pace of asset purchases,” Swonk wrote.

Mixed signals

But some Fed officials have been eager to look ahead to the Fed’s plans on winding down quantitative easing.

Atlanta Fed President Raphael Bostic said earlier in the month that there is the possibility that the economy improves enough this year to a point where he could “support pulling back and recalibrating a bit of our accommodation.”

But Philadelphia Fed President Patrick Harker said he did not see a case for “paring that back right now, or in the near future.”

The mixed signals may lead to a communication challenge for Powell, who will want to avoid then-Fed Chairman Ben Bernanke’s blunder on asset purchases that led to the “taper tantrum” of 2013.

Powell appears to be leaning toward a less-is-more approach on communication.

The Fed chair insisted that the economy is still “far” from the central bank’s goals, adding that he could offer more detail on the Fed’s plans for asset purchases when “clear evidence” points to progress.

“We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases,” Powell said on Jan. 14.

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