The Federal Reserve will ask for more fiscal support, the public debt could explode

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The result of the elections has never worried the Federal Reserve, but there is fear of a second economic slowdown due to the second wave of the pandemic: Powell reassured that the Fed will do its part by also asking for a fiscal plan. The federal funds rate will remain close to 0 and the bond purchase will continue at massive levels, indeed it could increase a lot to support a public debt about to explode.

The Federal Reserve has kept monetary policy steady with interest rates at historic lows and fixed bond purchase plan at $ 80 billion a month, as President Jay Powell warned that coronavirus cases increase around the world is “particularly worrying” and the second wave of the pandemic risks doing more damage than the first, especially in Europe. The Federal Open Market Committee, in a November 5 press release, said it will keep the federal funds rate close to 0% until the pandemic-affected economy reaches full employment with higher inflation.

The Fed will ask the new president for new fiscal support

For three months the Federal Reserve has implemented a wait tactic to avoid arousing any kind of inclination for one or the other candidate. The wait-and-see phase is also clearly visible from the graph, which shows how the Fed’s balance sheet has stopped from June to today.

federal reserve balance sheet 2020

To those who asked for a comment on the vote, Powell replied: “It’s a good time to step back and let the institutions of our democracy do their job,” he said.

As with Lagarde, Powell also points out that more fiscal support for Fed policies from Congress and the White House is needed to provide more support for the US fiscal economy now that previous stimulus cycles have largely ended. “All of us have experienced the years following the global financial crisis, and for several years, in the midst of the recovery, fiscal policy has been pretty tight” Powell said. “I think we will have a stronger recovery if we can get at least a little more fiscal support”. Negotiations for a substantial $ 2.2 trillion aid package have been stalled for months.

Impact on Treasury bonds

Investors say the recent decline in long-term Treasury bond yields has reduced the urgency for the Fed to change the composition of its bond purchase program in favor of longer-dated debt. Currently, the plan continues at a pace of monthly purchases of $ 80 billion worth of Treasuries of all maturities each month.

The Fed reiterated its intention to increase bond purchases “at least at the current pace to support the smooth functioning of the market and help promote accommodative financial conditions”. Powell also said the FOMC has discussed adjusting the asset purchase program parameters, but felt the current position is right for now. “He’s doing very well” he said.

The federal government recorded a $ 3.1 trillion deficit during the fiscal year through September, according to the Treasury Department, more than double the previous record. The debt-to-GDP ratio was on track to hit 98% in September, the Congressional Budget Office said, and could rise to nearly 200% by 2050. The Federal Reserve may have to buy even more government debt to prevent market indigestion. Powell is already on that road.

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