Jumping prices and the ghost of 2013’s market meltdown loom over the Fed.
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.
The Federal Reserve is debating when and how to slow its massive bond purchases, the first step in moving away from its emergency stance as the economy rebounds from the pandemic. As it does, the hole the coronavirus has dug in the job market is looming.
The reasons for withdrawing support soon are obvious. Growth is strong, supported by large government spending. Inflation has accelerated and, while this is probably only a temporary situation, the price increase is surprisingly strong.
But the employment situation is another story. About 6.8 million jobs are missing from employers’ payrolls compared to February 2020.
The central bank has every reason to expect the economy to continue to recover once it slows down (or even stops) buying bonds. Asset prices could drop a bit and long-term interest rates could rise slightly, but the Fed’s key rate is still at its lowest, which should keep borrowing costs relatively low. Public spending continues to influence the economy. Many consumers are bursting with savings and spending them eagerly.
The key for Jerome H. Powell, the chairman of the Fed, and his colleagues is to avoid slumping the economy by surprising investors and causing market rotation, credit crunch and growth decline. brutal than expected.
The state of the labor market is a particularly good reason to proceed with caution. If the Fed accidentally sends too aggressive a signal to the markets, making financial conditions too tight while millions of people still need new positions, it could be a long way back to full employment.
The risk is especially great because a variant of the coronavirus is causing an increase in cases in many countries, including the United States. While it’s not yet clear to what extent the Delta variant is a hindrance to growth, she stressed that the pandemic is a persistent threat.
For now, the Fed is making sure to broadcast each additional step as it debates when and how to start moving away from its political support, something it only wants to do after the economy will have made further “substantial” progress. The idea is that a constant drip of communication will prevent any surprises that shake up the market.
And the central bank has set itself an even more ambitious and more patient interest rate target. Barring a big surprise in which financial risks or inflation boil dangerously, officials want the labor market to return to peak employment before lifting borrowing costs.
“They would like to wait,” said Kathy Bostjancic, chief US financial economist at Oxford Economics. She explained that officials weighed the need to keep long-term inflation a secret against the many jobs still missing – and hoped the price pressures would be short-lived.
“They are betting on the T word,” said Bostjancic. “Transient.”
Yet when this goal of “full employment” is achieved is a major unknown. Many workers have retired since the start of the pandemic, and it is unclear whether they will return to work even though the opportunities are plentiful.
But the participation rate of prime-age workers – the share of people aged 25 to 54 who are either working or actively looking for a job – has fallen sharply since last year, and Fed officials hope to see this figure recover. Persistent childcare issues and pandemic nervousness may prevent potential workers from staying at home.
The Fed is trying to wait and see what the job market can do.
“It would be a mistake to act prematurely,” Powell recently told lawmakers. “At some point the risks may shift, but at the moment the risks to me are clear. “
The airline industry made the unusual move on Tuesday to ask federal regulators to help increase the supply of jet fuel to Reno-Tahoe International Airport, one of many small airports in the West that have been affected by shortages.
In a petition, Airlines for America, a trade association, and World Fuel Services, a company that supplies airlines with fuel, warned the Federal Energy Regulatory Commission that the jet fuel shortage has become so severe it could force airlines airlines to cancel passenger and cargo flights. The trade group predicted low fuel inventories through Labor Day.
The airline industry wants the commission to force pipeline operators to deliver more jet fuel to Reno airport by temporarily prioritizing these supplies over other fuels like gasoline and diesel.
Shortages at small airports, primarily in the West, were caused by several factors, including the post-pandemic travel boom, a shortage of truck drivers, and increased demand for jet fuel by firefighting crews. who are trying to put out several large forest fires. with planes.
At the same time, airlines have increased flights to destinations like Reno above 2019 levels due to the popularity of national vacation spots like Lake Tahoe, whose north shore is less than an hour away. from Reno airport by car.
Tom Kloza, global head of energy analysis at the Petroleum Price Information Service, said another driver of the scarcity was problems with refineries in Western states that turn crude oil into jet fuel, gasoline and diesel. Many are not operating at full capacity due to unscheduled maintenance and because recent heat waves have made it difficult for these industrial facilities to operate normally.
“It’s unusual but it’s really limited to Western geography,” Kloza said.
Airlines operating from several airports in Nevada, the Pacific Coast and in and around the Rocky Mountains have been forced to delay and cancel flights in recent days. The Oil Price Information Service said the situation is expected to worsen, especially if forest fires persist in August. The news service reported that other airports that have experienced “melee jet fuel supplies” include those serving Sacramento; Boise, Idaho; and Spokane, Wash.
“The carriers point out that every regional airport that is not supplied by pipeline is struggling to get enough fuel to meet the high summer demand,” Kloza said.
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