Federal Reserve Announces Plan to Slow Bond Buying Program
The Federal Reserve is dealing with high inflation at a time when millions of workers remain on the job market’s sidelines.,
Fed Announces Plan to Slow Its Bond Buying Program
The Federal Reserve is dealing with high inflation at a time when millions of workers remain on the job market’s sidelines.
Jerome H. Powell, the Fed chair, has signaled that he and his colleagues would react if they believed that rapid price gains were going to be sustained.Credit…Sarahbeth Maney/The New York Times
Federal Reserve officials took their first major step toward withdrawing monetary policy support as the economy heals from pandemic disruptions, laying out a plan to slow their asset buying program as they struck a slightly more worried tone about rapid inflation.
“In light of the substantial further progress the economy has made toward the committee’s goals since last December, the committee decided to begin reducing the monthly pace of its net asset purchases,” the Fed said in a statement released Wednesday, referring to its policy-setting group.
The central bank has been buying $120 billion in mortgage-backed securities and Treasury bonds each month to keep cash flowing through the financial system, but will reduce that by $15 billion per month starting this month. That pace would bring the program to a close by the middle of 2022 if it is sustained.
The Fed’s main policy interest rate — which affects borrowing costs across the economy — remains set at near zero. Officials have signaled that they will use that rate, which is the more powerful of the Fed’s tools, to help the recovery along until the labor market is more fully healed.
But their plan to remain patient could be upended by rapidly rising prices. The Fed is tasked with achieving full employment and keeping price gains low and stable. If inflation does not fade next year as policymakers expect, they might decide to lift interest rates to slow down demand and keep inflation in check.
In the November policy statement, officials noted that price increases have been rapid lately, and though they predicted that this burst of inflation will fade, they toned down their certainty. They had previously said that factors causing elevated inflation were transitory, but updated that language to say that the drivers were “expected to be” transitory.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the statement added.
Prices picked up by 4.4 percent in the year through September, well above the Fed’s 2 percent goal. The price gains have been decelerating in recent months after popping this summer, but it is possible that rising rents, climbing labor costs and continued supply chain disruptions could keep them elevated in the months ahead.
Fed officials are willing to tolerate a temporary bout of inflation as the economy reopens from the pandemic, but if consumers and businesses come to expect persistently higher prices, that could spell trouble. High and erratic inflation that persists would make it hard for businesses to plan and might eat away at wage increases for workers who lack bargaining power.
Jerome H. Powell, the Fed chair, has signaled that he and his colleagues would react if they believed that rapid price gains were going to be sustained.
Mr. Powell said during a news conference following the Fed’s release on Wednesday that he and his colleagues want to make sure that their policy is in a position to address a full range of “plausible” economic outcomes. He also said that inflation should fade, though when supply chain disruptions will ease is uncertain.
“We understand the difficulties that high inflation poses for individuals and families,” he said, noting also that “our tools cannot ease supply constraints.”
He said that the Fed can probably wait to raise interest rates, but if conditions surprised policymakers, they would respond.
Understand the Supply Chain Crisis
First, demand for home goods spiked. Money that Americans once spent on experiences were redirected to things for their homes. The surge clogged the system for transporting goods to the factories that needed them — like computer chips — and finished products piled up because of a shortage of shipping containers.
Now, ports are struggling to keep up. In North America and Europe, where containers are arriving, the heavy influx of ships is overwhelming ports. With warehouses full, containers are piling up at ports. The chaos in global shipping is likely to persist as a result of the massive traffic jam.
“We think we can be patient,” Mr. Powell said. “If a response is called for, we will not hesitate.”
Slowing bond purchases now will leave the Fed more nimble going forward. Many officials would not want to lift interest rates while they are still making large bond purchases, because doing so would mean that their two tools are working against one another. Finishing the buying program sooner will leave central bankers in a position to lift borrowing costs if a rate increase is deemed necessary.
Fed officials have tried to separate the path to slow bond buying, commonly called “tapering,” from their plans for interest rates. Even so, investors increasingly expect rate increases to start midway through 2022, market pricing suggests.
But there are potential costs to lifting borrowing costs early or aggressively. Many workers have yet to return to the job market after employment plummeted amid pandemic lockdowns. Some employees may have retired, but many people who are now on the labor market’s sidelines may trickle back to the job search as child-care issues are resolved and health concerns wane.
If the Fed slows the economy before they do that, it could be harder for them to move into new jobs, leaving the economy with less potential and families with fewer paychecks.
This is a developing story. Check back for updates.