Why the Federal Reserve Wants to Keep Growing Its Balance Sheet

The Federal Reserve has released its statement covering the November 4 and November 5 Federal Open Market Committee (FOMC) meeting. While the Fed always maintains that it is promoting its maximum employment and price stability, the Fed has made a policy shift in 2020 that looks to at least verbally be targeting slightly higher inflation. Some in the investing community have deemed this to be yet another tool to prevent deflation.

Thursday’s statement included a note that economic activity and employment have both continued to recover from the depths earlier this year. Those both remain handily under their record-breaking levels at the start of 2020.

One aspect that the Fed did target was that lower oil prices have been keeping consumer prices lower in general. There is also an admission that the path of the economy (looking forward) will depend “significantly on the course of the virus.” As long as the COVID-19 pandemic exists, the Fed’s view is that it will weigh on economic activity, employment, and inflation. And beyond the near-term the coronavirus brings considerable risks to the medium-term economic outlook as well.

The FOMC Statement from November did offer some specifics about its disappointment with inflation. It said:

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

On top of a pledge to keep interest rates much lower for longer, the FOMC further committed to increasing its holdings of Treasury and mortgage-backed securities over the coming months at least at the same pace it has been buying.

As of the latest report, the Fed’s balance sheet trends showed more than $7.1 trillion in total assets.

Before treating quotes as promises, it is important to understand that Jerome Powell and his Fed presidents have left wiggle room for either a better economy or a worse economy. It is also just another effort that includes much more than just the dual-mandate of price stability and full employment. The November FOMC statement said:

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

As the equity markets have been rallying for the fourth straight day, more attention is being given toward the pending outcome or outcomes from the 2020 elections.

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