Fed Considers Tapering Bond Purchases as Economy Grows

Fed Considers Tapering Bond Purchases as Economy Grows
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Fed Considers Tapering Bond Purchases as Economy Grows

Fed Considers Tapering Bond Purchases as Economy Grows

Federal Reserve officials are meeting in Washington this week with monetary policy still in emergency mode, even as the economy rebounds and inflation accelerates.

Economists expect the central bank’s statement after the 2 p.m. Wednesday meeting to leave the policy unchanged, but investors will watch closely a subsequent press conference with Fed Chairman Jerome H. Powell for everything clue as to when – and how – officials might start to withdraw. their economic support.

That’s because Fed policymakers are debating their plans for future “tapering,” the term widely used to slow monthly purchases of government-guaranteed debt. Bond purchases are meant to keep money in the economy by encouraging lending and spending, and slowing it down would be the first step in shifting policy towards a more normal setting.

Important and often contradictory considerations weigh in on the cone debate. Inflation has accelerated more sharply than many Fed officials expected. These price pressures are expected to subside, but the risk they persist is a source of discomfort, heightening the urgency to create some sort of exit plan. At the same time, the job market is far from over, and the burgeoning variant of the Delta coronavirus means the pandemic remains a real risk. Political missteps could prove costly.

Here are some key things to know about buying bonds and the main details Wall Street will be watching:

  • The Fed buys $ 120 billion in government-backed bonds each month – $ 80 billion in Treasury debt and $ 40 billion in mortgage-backed securities.

  • Economists mainly expect the central bank to announce its intention to slow down such purchases this year, possibly as early as August, before recalling them later this year or early next year. This slowdown is what Wall Street calls a “cone.”

  • There is a heated debate among policy makers as to how this reduction should play out. Some officials believe that the Fed should first slow down the buying of mortgage debt because the housing market is booming. Others said buying mortgage-backed securities had little special effect on the housing market. They have suggested or stated that they would favor the gradual reduction of both types of purchases at the same speed.

  • The Fed is acting with caution, and for a reason: In 2013, markets rocked when investors realized that a similar bond-buying program after the financial crisis would soon slow down. Mr. Powell and his team don’t want to set up a replay.

  • Buying bonds is just one of the Fed’s policy tools and is used to lower long-term interest rates and to circulate money in the economy. The Fed also sets a key interest rate, the federal funds rate, to keep borrowing costs low. It has been close to zero since March 2020.

  • Central bankers have made it clear that the gradual reduction in bond purchases is the first step towards exiting politics from an emergency. Fund rate increases remain extinct for the distant future.

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