Fed has good reasons to punt on monetary policy at FOMC meeting


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By Eric Stein, CFAChief Investment Officer, Fixed Income, Eaton Vance Management

Boston - The Federal Open Market Committee (FOMC) meets this week, and I think it's unlikely that we'll see any substantive shift in monetary policy in Wednesday's announcement. There is some talk in the market that the Fed may extend the maturity of its QE purchase program at the meeting, but there are good reasons to believe this won't happen.

Without doubt, the Fed is concerned about the recent rise in COVID-19 cases and the short-term implications for the economy, but I don't believe that is sufficient for a change in policy at this meeting. We have buoyant financial conditions, and nothing from the market's perspective suggests that lengthening the maturities of QE purchases, or any other form of policy easing, is needed.

With vaccinations set to be underway, the prospects for the economy over the medium term look a lot better, and I believe that is what investors are focusing on. That gives the Fed leeway to offer some vague guidance about the future of its QE program and "punt" the issue into 2021. A more likely decision point, in my view, will be mid- to late 2021, when the state of the economy could be almost entirely dependent on the success of the vaccines now being rolled out.

For me, the more interesting development at the Fed is the Biden administration's likely shift in focus to fiscal policy from monetary policy, as Janet Yellen takes over as Treasury Secretary. I think there is a growing consensus that monetary policy has largely run its course.

Bottom line: We have a short-term financial aid package being debated in Congress, and that could be a prelude to a lot more market focus on fiscal stimulus by the new administration, and less emphasis on monetary policy — a topic I will continue to discuss in future blogs.