Rising prices and the specter of 2013’s market crash

Economists mostly expect the Federal Reserve to announce its plans to slow bond buying this year.
Credit…Stefani Reynolds for The New York Times

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.

The Federal Reserve is debating when and how to slow down its massive bond purchases, the first step away from its emergency stance as the economy recovers from the pandemic. As it stands, the hole the coronavirus has opened in the labor market looks big.

The reasons for withdrawing support soon are obvious. Growth backed by large government spending is coming in strong. Inflation has warmed, and while this is expected to be temporary, the rise in prices surprisingly strong.

But the job situation is another story. About 6.8 million jobs Missing employers’ payrolls compared to February 2020.

The central bank has every reason to expect the economy to continue to improve once it slows (or even stops) bond buying. Asset prices may drop slightly and long-term interest rates may rise slightly, but the Fed’s policy rate is still low, which could keep borrowing costs relatively low. Government spending continues to flow into the economy. Many consumers are brimming with savings and eagerly spending them.

The key for Fed chairman Jerome H. Powell and his colleagues is to avoid suffocating the economy by surprising investors and causing markets to spin, credit dry up and growth to pull back more abruptly than planned.

The state of the job market is a particularly good reason to proceed with caution. If the Fed inadvertently sends an overly aggressive signal to the markets, causing financial conditions to become too restrictive while millions still need new positions, there may be a long way to go to full employment.

The risk seems particularly great as a coronavirus variant has caused an increase in cases in many countries, including the United States. He underlined that the pandemic is a persistent threat, although it is still unclear how much of a barrier the Delta variant poses to growth.

For now, the Fed is careful to publish each incremental step as it discusses when and how it will begin to move away from policy support, only wanting to do so after the economy has made “significant” progress. The idea is that a constant drip of communication will prevent market-shaking surprises.

And the central bank has set an even more ambitious and patient target on interest rates. Except for some big surprises where financial risks or inflation rise dangerously, Authorities want to see The job market returns to maximum employment before raising borrowing costs.

“They want to wait,” said Kathy Bostjancic, chief US financial economist at Oxford Economics. He explained that officials weighed in on the need to keep long-term inflation private, with many jobs still missing, and hoped price pressures would be short-lived.

“They trust the T-word,” said Ms. Bostjancic. “Temporary.”

However, when this “full employment” target will be achieved is a great unknown. Many workers have retired since the start of the pandemic and it is unclear whether they will return to work, even if opportunities are plentiful.

But participation rate The proportion of those aged 25 to 54 working or actively looking for a job has fallen sharply since last year, and Fed officials are hoping that figure will pick up. Ongoing childcare issues and pandemic nervousness may be keeping prospective employees at home.

The Fed is trying to wait and see what the job market can do.

“It would be a mistake to act early,” said Mr. Powell. recently told lawmakers. “At a certain point the risks may reverse, but for me right now the risks are clear.”

Reno-Tahoe International Airport in Reno, Nev, is seeking help to increase its fuel supply.
Credit…Martha Irvine/Associated Press

The airline industry took the unusual step Tuesday to ask federal regulators to help increase the supply of jet fuel at Reno-Tahoe International Airport, one of the few small airports in the West affected by famines.

In a petition, Airlines for America, a trade association, and World Fuel Services, a company that supplies fuel to airlines, warned the Federal Energy Regulatory Commission that jet fuel shortages could force airlines to cancel passengers and cancel airlines. cargo flights The trade group predicted low fuel stocks during Labor Day.

The airline industry is asking the commission to require pipeline operators to deliver more jet fuel to Reno airport, temporarily prioritizing these supplies over other fuels such as gasoline and diesel.

The famine at smaller airports, mainly in the West, was caused by a variety of factors, among them. post-pandemic travel boom, truck driver shortages, and increased demand for jet fuel by firefighters trying to put out several major wildfires with airplanes.

At the same time, airlines have increased their flights to destinations like Reno above 2019 levels due to the popularity of domestic resorts like Lake Tahoe, which is less than an hour’s drive from the north coast Reno airport.

Tom Kloza, head of global energy analysis at the Oil Price Information Service, said another factor in the shortages was problems at refineries in Western states converting crude oil into jet fuel, gasoline and diesel. Many are not operating at full capacity due to unscheduled maintenance and recent heat waves have made it difficult for these industrial plants to operate normally.

“This is unusual but really confined to Western geography,” Mr. Kloza said.

Airlines operating at several airports in Nevada, the Pacific Coast and in and around the Rocky Mountains have had to delay and cancel their flights in recent days. The Oil Price Information Service reported that the situation is expected to worsen, especially if the wildfires continue into August. The information service reported that other airports experiencing “hand-to-mouth jet fuel supplies” include those serving Sacramento; Boise, Idaho; and Spokane, Wash.

“Transporters stress that every regional airport that is not pipelined is struggling to find enough fuel to meet strong summer demand,” said Mr. Kloza.

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