The Fed’s Latest Balance Sheet Guidance: A Compass, Not a Map

At the December 2020 meeting of the Federal Open Market Committee (FOMC), the Fed kept the pace and composition of its asset purchases unchanged, but provided new forward guidance, in line with expectations. According to the Fed statement, the current pace of asset purchases will remain in place until “substantial further progress” has been made toward achieving the Fed’s dual mandate objective. In practice we think this means at a minimum through late 2021.

The Fed has now provided some degree of forward guidance for both of its monetary policy tools – balance sheet and interest rates – completing the transition from crisis management to monetary policy accommodation aimed at supporting the ongoing recovery. While the Fed has spelled out specific metrics it needs to see before it would consider its first policy rate hike since 2018, Wednesday’s balance sheet guidance was left vague. This likely reflects significant uncertainty about the economic recovery and a difference in views among members of the committee about the extent to which additional monetary policy support is needed. However, the absence of more specific guidance on the balance sheet also means market participants will be left searching for clues on what “substantial” progress means

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