Entering text into the input field will update the search result below

Looking Beyond Market Stabilization To The Future Path Of Monetary Policy

PIMCO profile picture


  • Over the coming months, we think the Fed's focus will shift from one of crisis management to one of keeping financial conditions easy.
  • The Fed isn't expecting normal anytime soon, and was comfortable enough with the market's progress to begin dialing back its pace of purchases in early April.
  • Instead of posting daily purchase schedules a few days or weeks at a time, which helped the Fed maintain flexibility and react to real-time liquidity conditions, the Fed is likely to announce an open-ended program, tapering the pace of purchases until it reaches a steady state monthly net pace of $100 billion per month for Treasuries and $25 billion per month for MBS.
  • Over the next several quarters, monetary conditions will likely be set not only by Fed balance sheet policies, but also by the expected path of interest rates.

Coming into the April meeting of the Federal Open Market Committee (FOMC), the policy rate was already at the effective lower bound, and the Federal Reserve had already introduced a range of lending facilities spanning asset markets, all in an effort to mitigate the economic damage of COVID-19. As a result, the market expected little in the way of "new" programs to ease credit conditions.

Still, over the coming months, we think the Fed's focus will shift from one of crisis management to one of keeping financial conditions easy. Indeed, Fed Chair Jerome Powell hinted at this during the press conference Wednesday, saying that while the Fed's asset purchases support market functioning, they also "foster more accommodative financial conditions." As its objective shifts - and as early as June - we think the Fed will provide additional, more tangible, guidance on the path of large-scale asset purchases, and on interest rates.

Since mid-March, the Fed's balance sheet has swelled with an unprecedented pace of purchases of U.S. Treasuries and agency mortgage-backed securities (MBS). However, as markets pulled away from the brink of collapse, the Fed started to dial back the weekly pace of purchases in early April. Over the next few weeks, we think the Fed will likely continue to taper toward a "steady state" level, which it will then maintain at least through the fourth quarter of this year, by our estimates.

Eventually, as more information is gained on the depth of the recession and the extent of the recovery after the economy reopens, the Fed will also likely strengthen its forward guidance for the path of interest rates. The economic rebound is likely to be slow even as the economy reopens, and it will likely be some time before the U.S. economy reaches full employment and 2% core PCE inflation (the Fed's inflation target, measured by

This article was written by

PIMCO profile picture
PIMCO is a global leader in active fixed income. With our launch in 1971 in Newport Beach, California, PIMCO introduced investors to a total return approach to fixed income investing. In the 50 years since, we have worked relentlessly to help millions of investors pursue their objectives – regardless of shifting market conditions. As active investors, our goal is not just to find opportunities, but to create them. To this end, we remain firmly committed to the pursuit of our mission: delivering superior investment returns, solutions and service to our clients. Visit PIMCO’s blog. Subscribe To Get PIMCO Insights Delivered Directly to Your Inbox.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.