Fed's Bostic says bond-buying 'recalibration' could happen in 2021

WASHINGTON (Reuters) - The Federal Reserve could begin to trim its monthly asset purchases this year if distribution of coronavirus vaccines boosts the economy as expected, Atlanta Fed President Raphael Bostic said on Monday in what amounted to a bullish outlook for the coming months.

“I am hopeful that in fairly short order we can start to recalibrate,” the $120 billion in U.S. Treasury and mortgage-backed securities that the U.S. central bank is currently buying each month, Bostic said in an interview with Reuters.

The Fed said in a policy statement last month that it would keep those purchases in place “until substantial further progress has been made” in restoring the economy to full employment and lifting inflation towards the central bank’s 2% goal.

Bostic said the coming weeks will “be somewhat difficult” for the economy with COVID-19 still spreading and any change in Fed policy tied tightly to a successful vaccine rollout that curbs the pandemic.

Still, he felt the country could be nearing the moment when those “post-vaccine” dynamics start to take shape, and warrant debate about when to scale back the aggressive steps taken in March to nurse the economy through its worst downturn in a century.

“I am hopeful that moving on into this year that the signals for weakness start to dissipate and the conversation turns consistently and robustly to sort of steady and broad-based growth,” Bostic said. He added that he was hopeful also that progress will be enough to let the Fed bring its asset holdings back to a level “more in line” with what existed before the pandemic.

“If we determine things have strengthened appreciably, that we have made significant progress, then we will think about the next appropriate action.”

CRISIS-FIGHTING MEASURES

The Fed’s holdings grew rapidly from around $4 trillion to $7 trillion last year as it ramped up asset purchases to help the economy, and will continue expanding for now. The purchases initially helped financial markets through a turbulent few weeks last spring, and are now aimed to keep long-term interest rates low, a boon to businesses and consumers.

But Bostic’s comments are among the most explicit yet from Fed officials about how vaccines may accelerate debate over when and how to exit the central bank’s core crisis-fighting measures.

In separate comments, Chicago Fed President Charles Evans also said policymakers were poised to push bond-buying in either direction - adding more if the economy seems to need it but also open to cutting back if the recovery and vaccines gain traction.

Bostic said he is optimistic the better outcome is now more likely, with additional fiscal help in place following the passage by Congress of a roughly $900 billion package to extend unemployment insurance and other benefits, and the vaccine distribution system likely to improve over time.

Bond-buying is only one of the tools the Fed deployed to fight the recession triggered by the pandemic.

But with the other main tool - the Fed’s benchmark overnight lending rate - likely on hold for years to come, the asset purchase program may now be the key measure of how the central bank is thinking about the economy and how to shape policy to it.

After a dramatic year, that may already be changing.

Until the Fed’s Dec. 15-16 policy meeting, many market analysts expected the central bank was on the verge of expanding its asset purchases to more fully support the economic recovery and try to further lift still-weak inflation.

The Fed, however, held those purchases steady, with news of vaccines offering some hope the worst had passed, and Fed Chair Jerome Powell emphasizing he felt the current level of purchases was providing adequate economic support.