The Federal Reserve has bought trillions of dollars in Treasuries just to fix the bond market. It may need to buy a lot more to help repair the economy.
A surge of new coronavirus cases is clouding the economic outlook in the U.S., and that's likely to translate into pressure for more action from the Fed -– maybe as soon as this month's meeting. Fed Gov. Lael Brainard hinted as much Tuesday, saying the central bank should pivot its policies toward providing longer-run accommodation.
Wall Street strategists and Fed officials say the focus will now be on sustaining a recovery and potentially keeping a lid on long-term yields as the government pumps in even more fiscal stimulus. The Fed has also been compressing yields with emergency lending facilities supporting everything from municipal to corporate debt. But those programs are temporary.
"There is a transition that they have to negotiate over the next few meetings from purchasing assets for the avowed intention of market functioning to more traditional large-scale asset purchases" to reduce term premiums and so lower long-term borrowing costs, said William English, former director of the Fed Board's Division of Monetary Affairs, and now a professor at the Yale School of Management.
In a sign that traders are wary that the Fed could ramp up quantitative easing and buy more long-term debt, the Treasuries yield curve has been flattening in recent weeks. The gap between 5- and 30-year yields has fallen to about 105 basis points, from as high as 129 last month, the peak for 2020.