The Federal Reserve will hold initial negotiations on reducing its monthly asset purchase scheme by $ 120 billion, in a difficult first step toward regaining the huge monetary stimulus put in place during the pandemic.
The discussion is scheduled to begin until this week’s meeting of the Federal Open Market Committee and will extend into the coming months, as officials weigh in on a stronger economic recovery and higher inflation data.
Jay Powell, the president of the Fed, has signaled that he will proceed with caution and give a broad warning about the U.S. central bank’s plan to “decrease” bond purchases.
The Fed said it would need to see “substantial further progress” toward its goals to begin slowing its fiscal expansion. While that standard may have been met on inflation, the labor market recovery has been less robust and full of uncertainty.
On the other hand, Fed officials do not want to repeat the experience of the “taper tantrum” of 2013 – a sharp sell-off of Treasury debt sparked by the Fed’s plans to ease its quantitative easing after the financial crisis.
“If you’re the person who makes the decision as Powell is, 2013 probably seems to you – maybe bigger than it should be. You don’t want to be the author of another child, which is definitely in mind,” Jeremy said. Stein, an economist at Harvard University and governor of the Fed at the time.
The US central bank has indicated that the decline in asset purchases will not be dictated by any predefined chronology, but by the evolution of the economy. He set an even higher bar to raise interest rates from close to zero, where they have been since the beginning of the pandemic.
The Fed is in a relatively comfortable position heading toward the heated discussion, given the calm of financial markets. Equity prices are trading near all-time highs and 10-year Treasury yields have fallen in recent weeks, even as inflation data have shown a stronger price increase than in anticipation.
“They had markets to believe that these very high inflation numbers are transient. That’s exactly what they hoped for. And they realized it,” said Randall Kroszner, a professor at the University of Chicago’s business school and former governor. of the Fed.
“It gives them a lot of track to try to build very, very slowly expectations [on tapering], have discussions and debates. And then when the time comes, start the move. ”
But Powell will also be aware that the Fed cannot move too slowly in terms of decline. It risks being criticized for complacency if the recovery picks up even faster than expected, and fears of overheating begin to materialize.
“It’s just going from an emergency reception policy to a very easy monetary policy… It’s time to start the descent,” said Rick Rieder, head of global fixed income investment at BlackRock. “Markets would feel much better knowing that the seat belt sign is activated and we can start landing.”
Ian Shepherdson of Pantheon Macroeconomics said markets should be “strong enough” in the face of the Fed’s decline.
“It has now become much more difficult to justify the continued annual rates of QE trillion dollars when the economy is obviously picking up strongly,” he said.
“Fiscal policies are super accommodating and the fundamentals are much, much stronger than they were in 2013 when the echoes of the 2008 crash were still really strong. So it’s a different planet.”
Moving too aggressively toward a taper would carry its dangers, Stein said. It could undermine the Fed’s message that inflation is under control and a labor market it is far from being completely healed.
“The Fed has tried to make sure, I think reasonably convincingly, that a lot of this inflation is transitory, there’s nothing to really shake. The risk is that if they move the taper up now, the market will take this as a signal. they are starting to see something a little more permanent about inflation, he said.
As early as April, Powell insisted that the Fed was not even thinking about a discussion on the decline, but in recent weeks senior central bank officials have indicated that the central bank would be ready to proceed with the discussion in future meetings.
Although the cone is not an item on the formal agenda at this week’s FOMC, early discussions in this regard are scheduled for Tuesday and Wednesday.
There are many details to resolve, including the time and conditions of the taper, such as the speed and composition of the pre-acquisition in the asset acquisition. Some economists call on the Fed to reduce the pace of purchases of mortgage-backed securities before the acquisition of Treasury bonds, given the boom state of the housing market.
But Powell is unlikely to reveal any specifics of the plan until the economic picture is clearer, most likely not before the August Jackson Hole conference in August.
“There will be recognition that they have begun to have a conversation about what the potential path for the acquisition of goods will be. But they will repeat that it will still take some time before they have made substantial progress,” said Michelle Meyer, senior economist at Bank of America.
“This will make it clear that they are responsible, that they are trying to plan ahead.”