Federal Reserve Officials Fretted Over Covid Surge at December Meeting

Federal Reserve officials were warily eyeing a surge in coronavirus cases at their Dec. 15-16 meeting, but they hoped that vaccine breakthroughs might set the stage for a strong economic rebound in 2021.

“With the pandemic worsening across the country, the expansion was expected to slow even further in coming months,” according to minutes from the gathering of the Federal Open Market Committee, released Wednesday. “Nevertheless, the positive vaccine news” was “viewed as favorable for the medium-term economic outlook.”

Central bank officials held interest rates steady at near zero at the meeting, and committed to buying up $120 billion in bonds each month “until substantial further progress has been made toward the committee’s maximum employment and price stability goals.” They have been rapidly expanding their holdings of government and mortgage-backed debt since March to keep markets calm and many types of credit cheap.

The Fed essentially sets the price of borrowed money to help to guide demand in the economy, goosing conditions when times are tough to help bolster growth and hiring. The central bank also tries to keep price increases stable at around 2 percent, though officials formally updated their policy-setting approach last year to emphasize that they would welcome slightly faster increases after years and years of weaker ones.

Minutes showed that the Fed discussed the balance sheet guidance in depth at the meeting, with “a few” remarking that the new wording signaled that the Fed could ramp up bond buying “if progress toward the committee’s goals proved slower than anticipated.”

Many analysts had expected that the Fed would shift its bond purchases toward longer-dated debt to try to eke out a bigger bang per buck, given that short-term rates are already very low, but the minutes suggest that there was little appetite for such a change. Only “a couple of participants indicated that they were open to” shaking up the composition of purchases.

The Fed’s December meeting took place as virus cases surged after Thanksgiving. Since then, the number of new cases moderated at first but then resumed their increase.

Officials have been voicing hope that vaccine distribution, which has gotten off to a slow start in much of the United States, will pave the way for an economic rebound in the latter half of 2021. They have been clear that their outlook hinges on the success of that process and the path of the pandemic.

“The second half of the year looks much more promising because of vaccinations,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said on a call with reporters this week.

But even if the rebound is remarkable, officials have been clear that they are likely to remain patient in taking support away from the economy.

Ms. Mester, who has a history of favoring higher rates than many of her colleagues, has said she probably would not be worried about 2.5 percent inflation. Her colleague Charles Evans, who is president of the Federal Reserve Bank of Chicago and a monetary policy voter this year, said during an event on Tuesday that a 3 percent price gain pace “would not be so bad.”

Presidents at 11 of the Fed’s 12 regional banks share rotating votes on monetary policy. The Federal Reserve Bank of New York president and members of the Board of Governors in Washington hold a constant vote on interest rates.

In the near term, economic weakening — rather than navigating a rapid rebound — is likely to be the main challenge confronting the Fed. Private payrolls contracted by 123,000 jobs between November and December, data from ADP showed on Wednesday. The government’s official employment report on Friday is expected to show either a marked slowing in job gains or a return to outright losses.

According to the December minutes, “Participants saw increased challenges for the economy in the coming months, as the ongoing surge of Covid-19 cases and the related mandatory and voluntary measures prompted greater social distancing and damped spending, especially on services requiring in-person contact.”

The Fed’s December meeting took place before two significant developments that could affect the economy in the short term. Late last month, Congress agreed to provide additional support to the American economy in the form of a $900 billion relief bill.

And Democrats appeared on the cusp of retaking the Senate, which could pave the way for easier passage of the priorities of President-elect Joseph R. Biden Jr., which could include additional fiscal help for firms and families.

“The Fed will welcome greater prospects of fiscal support, which most officials believe is better targeted to address challenges unique to the Covid cycle than monetary policy,” economists at Evercore ISI wrote in a research note on Wednesday.