Fed "Maintaining Current Level of Asset Purchases Appropriate... Advance Messaging Required if Reduction Occurs"

U.S. Federal Reserve (Fed)
Photo by Reuters Yonhap News

[Asia Economy Reporter Jeong Hyunjin] The U.S. Federal Reserve (Fed) reaffirmed its intention to maintain the scale of its asset purchase program, which was implemented to prevent liquidity deterioration caused by the novel coronavirus disease (COVID-19). It also expressed the view that if the program is to be reduced, sufficient external communication will be made beforehand to prevent market shocks.

According to Bloomberg and others on the 6th (local time), the minutes of the Federal Open Market Committee (FOMC) meeting held on December 15-16 last year, released by the Fed on the same day, included the statement that "all participants judged it appropriate to continue asset purchases at least at the current level."

To mitigate the economic impact of COVID-19, the Fed has maintained a 'zero (0)' interest rate and is purchasing U.S. Treasury securities and mortgage-backed securities (MBS) worth $12 billion monthly. Regarding this, the Fed promised after last month's FOMC meeting to maintain the asset purchase program until "substantial further progress" is made toward employment and inflation goals.

There were market expectations that the Fed might expand the scale of asset purchases or increase the proportion of long-term bonds, but the minutes only contained content suggesting that "some participants indicated that if adjustments are necessary, they could consider increasing the pace of bond purchases or raising the proportion of long-term Treasury purchases." The Wall Street Journal (WSJ) evaluated this as "the Fed showed support for continuing asset purchases but did not find reasons to further stimulate the economy through them."

FOMC participants unanimously agreed that asset purchases should be based on outcomes but mentioned that this does not imply operating with specific target figures.

Additionally, FOMC members expressed the view that if there is a need to reduce the scale of this asset purchase program in the future, the market should be sufficiently informed. This is to prevent a 'taper tantrum'?a market shock caused by a sudden shift from accommodative to tightening monetary policy. This aligns with Fed Chair Jerome Powell's intention to clearly notify the market well before starting tapering.

According to the minutes, several participants mentioned at last month's meeting that "before the FOMC judges that the situation warrants changing the pace of asset purchases, it is important to clearly communicate assessments of substantial and expected progress toward long-term goals." They also stated that if tapering occurs, it will be gradual and could follow a process similar to the large-scale purchase program initiated in 2013.

FOMC members viewed the current economic situation as having risks to economic activity that are more balanced than before. Regarding the COVID-19 vaccinations that began last month, they evaluated it as "favorable news for the medium-term economic outlook." However, they also expressed concerns that signs of a slowdown in the pace of recovery appeared in December last year.

This content was produced with the assistance of AI translation services.