As the recovery strengthens, the Fed will discuss slowing down stimulus measures
The Fed will hold preliminary negotiations to reduce its $120 billion monthly asset purchase plan, which is a difficult first step to withdraw its huge monetary stimulus measures during the pandemic.
It is expected that discussions will begin at the Federal Open Market Committee meeting as early as this week and will begin in the next few months, as officials weigh the stronger economic recovery and Higher inflation data.
Fed Chairman Jay Powell has hinted that he will proceed cautiously and has issued ample warnings about the Fed’s “scaling” bond purchase plan.
The Fed has stated that it needs to see “substantial further progress” towards its goal of starting to slow down its balance sheet expansion. Although inflation may have reached this standard, the recovery of the labor market is not so strong and full of uncertainty.
In addition, Fed officials do not want to repeat the mistake of “shrinking the panic” in 2013. After the financial crisis, the Fed plans to gradually reduce its quantitative easing policy, triggering a sharp sell-off of Treasury bonds.
“If you are a person who makes decisions like Powell, then 2013 may be important to you — it may be bigger than it should be. You don’t want to be another tantrum, it’s definitely in their minds In,” Harvard University economist and then Fed governor Jeremy Stein said.
The U.S. central bank stated that the reduction in asset purchases will not be determined by any preset timetable, but by economic development. It sets a higher threshold for raising interest rates from close to zero, which has been at this level since the beginning of the pandemic.
Given the calmness of the financial markets, the Fed is in a relatively comfortable position before entering the cutback discussion. Stock prices are close to historical highs, and 10-year US Treasury yields have fallen in recent weeks, despite inflation data showing that prices have risen more than expected.
“They convince the market that these very high inflation figures are temporary. This is what they want. They have done it,” Randall Kroszner, professor at the University of Chicago School of Business and former Fed governor, Randall Kroszner Say.
“It gave them a lot of runways to try to build expectations very, very gradually [on tapering], To discuss and debate. Then when the time is right, start to act. “
But Powell will also realize that the Fed cannot be too slow in downsizing. If the recovery is faster than expected and concerns about overheating begin to become a reality, it may be criticized for complacency.
“This is just a shift from emergency easing to very accommodative monetary policy… It’s time to start falling,” said Rick Rieder, BlackRock’s global fixed income chief investment officer. “Knowing that the fasten seat belt sign is on, we can start landing, and the market will feel much better.”
Ian Shepherdson of Pantheon Macroeconomics said that the market should be “quite resilient” in the face of the Fed’s contraction.
He said: “When the economy is clearly rebounding strongly, it is now more difficult to justify the trillion-dollar annualized interest rate for continued quantitative easing.”
“Fiscal policy is very loose, and the fundamentals are much stronger than in 2013, when the echoes of the 2008 crash were still very loud. So this is a different planet.”
Stein said that turning to the taper too aggressively brings its own danger.This may weaken the Fed’s message that inflation is under control, and labour market Far from being completely cured.
“The Fed has been trying to prove that I think this inflation is largely temporary, and there is nothing to be overly excited. I think it is very convincing. He said the risk is that if they raise the taper now, the market will Take this as a sign that they are beginning to see something more persistent about inflation.
As recently as April, Powell insisted that the Fed had not even considered discussions on reductions, but senior central bank officials have indicated in recent weeks that the central bank will continue to discuss it at the next meeting.
Even if the reduction is not an official FOMC agenda item this week, the first discussion about it is expected to take place on Tuesday and Wednesday.
There are many details that need to be resolved, including the timing and conditions of the reduction, as well as the speed and composition of the reduction in asset purchases. In view of the boom in the real estate market, some economists have called on the Federal Reserve to reduce the purchase rate of mortgage-backed securities before buying Treasury bonds.
But Powell is unlikely to reveal many details of the plan until the economic situation becomes clearer, most likely not before the Jackson Hole meeting in August.
“It will be acknowledged that they will start a dialogue on potential paths for asset purchases. But they will reiterate that it will take some time before further substantive progress is made,” Bank of America senior economist Michelle Meyer (Michelle Meyer) said.
“This will show that they are responsible and that they are working hard to plan ahead.”