Fed Considers Decreasing Bond Purchases as Economy Grows


Federal Reserve officials are meeting in Washington this week, monetary policy is still urgent even as the economy picks up and inflation picks up.

Economists expect the central bank’s post-meeting announcement Wednesday at 2:00 p.m. to not change policy, but investors will eagerly watch a subsequent press conference with Fed chair Jerome H. Powell for any clues as to when and how officials may begin a pullback. their economic support.

This is because Fed policymakers are discussing future “downsizing” plans, a term commonly used to slow monthly purchases of government-backed debt. Bond purchases aim to keep money flowing through the economy by encouraging lending and spending, and slowing them down will be the first step in moving policy towards a more normal environment.

Large and often contradictory considerations loom over the taper debate. Inflation rose More sharply than many Fed officials expected. These price pressures are expected to subside, but the risk of stalling is a source of discomfort, increasing the urgency to create some sort of exit plan. At the same time, the job market is far from improving and the increasing Delta coronavirus variant means the pandemic remains a real risk. Missteps in policy can be costly.

Here are a few key things to know about bond buying and key details for Wall Street to watch:

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

  • Economists mostly expect the central bank to announce its plans to slow these purchases before turning them off by the end of this year or early next year, perhaps by August this year. This slowdown is what Wall Street calls a “tapering.”

  • There is a heated debate among policymakers about how this contraction should be. Some officials I think the FED should slow down its mortgage debt buying first, as the housing market is booming. Others said that buying a mortgage security has little specific impact on the housing market. They implied or said that they would prefer to reduce both types of purchases at the same pace.

  • The Fed is acting cautiously and for a reason: in 2013, the markets were shaken when investors realize that a similar bond-buying program will slow down soon after the financial crisis. Mr. Powell and his crew don’t want a replay.

  • Bond buying is just one of the Fed’s policy tools and is used to lower long-term interest rates and keep money circulating in the economy. The Fed also sets a policy interest rate, federal funds rateto keep borrowing costs low. Close to zero since March 2020.

  • Central bankers are clear that reducing bond purchases is the first step in moving policy away from the emergency environment. Increases in the funds rate will remain closed in the distant future.


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