The Fed may see a brighter long-term outlook when it releases its economic forecasts Wednesday due to vaccine developments, but it also has the opportunity to disappoint at least some investors who are expecting immediate changes in its bond buying program.
The market has been divided about whether the Fed would extend the duration of its $80 billion Treasury purchases, meaning increase the purchases at the long end, like the 10-year note and 30-year bond. Theoretically, that should help keep down the longer term rates that impact mortgages and other loans.
But a number of economists instead expect the Fed to simply give out more information and guidelines on what would prompt it to make changes, saving the actual policy shift for later. Rates for now, are still low and financial conditions are favorable, and it is still unclear how much stimulus Congress will provide the economy.
The Fed will release its statement at 2 p.m., and Fed Chairman Jerome Powell holds a 2:30 p.m. ET briefing.
Because of the split views, the Fed has the potential with its Wednesday statement to move markets. The bond market has been betting to some extent on increased purchases of longer dated notes and bonds.
Forecast:
Now the market expects more definition of how the Fed will use the program. Some Fed watchers say the Fed would be better served waiting to see what sort of stimulus plan Congress develops before acting, and others, like Goldman Sachs, argue the spread of the virus at a record pace should be a catalyst for the Fed to move.
BlackRock
“At the end of the day they’re going to be dovish,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “The question is are they going to be dovish or super dovish? So do they extend the [duration of purchases]? I don’t think it matters when they do it, at this meeting or next. I think they’re going to do it.”
Rieder expects the Fed to ultimately shift the asset makeup but also increase the Treasurys purchased to $100 billion and reduce the $40 billion in mortgages it is currently also purchasing.
Citigroup
Citigroup economists see just a 25% chance the Fed alters the bond buying program.
Bank of America
Bank of America economists expect the Fed simply to change the language about its program but hold off on action. “The focus of the upcoming meeting will be on language changes as we expect the FOMC to leave its policy rate and its asset purchases unchanged. We believe neither economic nor financial conditions are sufficiently dire to warrant additional policy easing at this time,” notes Bank of America.
Grant Thornton
Diane Swonk, chief economist at Grant Thornton, said she thinks the Fed should keep its powder dry, not make changes but provide guidelines for what conditions would make it move.
“I think they should wait it out until they see if they have to pull the trigger. They are long-term bond holders. Once they go, it’s going to be harder to unwind it. You have to have a good reason to do it,” she said.
“I don’t think the Fed wanted to be in this position, but they didn’t define clearly enough what they were intending Whatever we hear from them would give them the flexibility to do something by the end of the week if Congress goes home and doesn’t do anything. They don’t have to wait until January,” said Swonk.
Swonk expects the Fed will also change the way it presents its economic forecast, to provide more context around risks to the forecast. “You could have a revised higher forecast with more risks,” she said.
Reference: CNBC
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