Federal Reserve Announces Plan to Slow Down its Bond-Buying Program


Federal Reserve officials took their first big step towards withdrawing monetary policy support as the economy recovered from the setbacks of the pandemic and devised a plan to slow their asset purchase programs as they sounded a little more worried about rapid inflation.

“In light of the substantial progress the economy has made towards the committee’s goals since last December, the committee has decided to slow the monthly pace of net asset purchases,” the Fed said in a statement Wednesday. setting group.

The central bank buys $120 billion in mortgage-backed securities and Treasury bills each month to keep cash flowing through the financial system, but will reduce that by $15 billion a month starting this month. This pace, if sustained, will end the program by mid-2022.

The main policy interest rate of the Fed, which affects borrowing costs throughout the economy, was set to be close to zero. Officials have signaled that they will use this rate, which is stronger than the Fed’s tools, to aid the recovery until the labor market fully recovers.

But plans to be patient can be upset by rapidly rising prices. The Fed is tasked with maintaining full employment and keeping price increases low and stable. If inflation doesn’t fall next year as policymakers expect, they may decide to raise interest rates to slow demand and keep inflation in check.

In a November policy statement, officials downplayed their certainty, even though they had predicted that price increases had been rapid lately and that this inflation boom would subside. They had previously said that the factors causing inflation to rise were temporary, but they used this language as drivers’ “expected to happen“temporary.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to significant price increases in some sectors,” the statement said.

Prices received 4.4 percent by September later in the year, well above the Fed’s 2 percent target. Price increases have been slowing in recent months after they exploded this summer, but rising rents, rising labor costs and ongoing supply chain disruptions are likely to keep them high in the months ahead.

Fed officials are willing to tolerate a temporary crisis of inflation as the economy reopens from the pandemic, but that could become problematic if consumers and businesses begin to expect consistently higher prices. Continued high and erratic inflation will make it harder for businesses to plan and can deplete wage increases for workers without bargaining power.

Jerome H. PowellThe Fed chairman has signaled that he and his colleagues will react if they believe rapid price increases will continue.

Slowing bond purchases will now leave them more agile going forward. Many officials don’t want to raise interest rates when they’re still making large bond purchases because doing so means the two brokers are working against each other. The earlier completion of the purchasing program will put central bankers in a position to raise borrowing costs if an interest rate hike is deemed necessary.

Fed officials have sought to decouple the way of slowing bond buying, commonly referred to as “tapering,” from interest rate plans. Even so, investors increasingly expect rate increases to begin in mid-2022. market offers prices.

However, there are potential costs to raising borrowing costs prematurely or aggressively. Many workers have yet to return to the job market after employment fell due to the pandemic lockdowns. Some workers may have retired, but many who are currently outside the labor market may return to job hunting once childcare issues are resolved and health concerns subside.

If the Fed slows the economy before they do, it may be harder for them to move into new jobs and they may leave the economy leaving the economy with less potential and families on lower wages.

This is a developing story. Check back for updates.





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