The summary of the Fed meeting earlier this month revealed that U.S. central bank officials are discussing ways to transfer more money to the economy still recovering from the coronavirus outbreak. In an environment where the political power is changing in the USA, the possibility of delay in the fiscal stimulus package increases the possibility that the Fed may take action or verbal guidance regarding the nature of the bond purchases in the next meeting.
The Fed's approach is that more can be done as conditions worsen or continue to be bad. Economic activity seems to be at good levels, but the impact that could lead to a new recession, high unemployment level and real income reduction pose risks to the economic outlook. If the decline in real income is to continue to put pressure on the demand level in the economy, it will cause a slowdown and lower inflation expectations. Financial incentives are necessary, the outcome of the Georgia elections on January 5th will determine the Senate arithmetic. If Biden becomes a "lame duck", this will of course affect the size and timing of the package, as well as prolong the negotiations. The cut of federal spending and aid and the Fed's transfer of funds not used within the framework of its financing programs to the Treasury will not bring back the jobs, and will cause the effect of real income decline to be felt more.
In this environment, the Fed may want to take a more active role. There may not be a quantitative change in terms of QE, but qualitative and technical details will be further deepened. It seems likely at the December FOMC meeting that the Fed will fine-tune the maturity structure of its bond purchases.
