Fed to discuss slowing stimulus with recovery strength

The Federal Reserve is set to hold preliminary talks about scaling back its $120 billion monthly asset purchase plan, in a tough first step toward undoing the massive monetary stimulus it put in place during the pandemic.

The discussion is expected to begin early in this week’s meeting of the Federal Open Market Committee and extend over the coming months, as officials weigh a stronger economic recovery and high inflation data.

Jay Powell, Fed Chairman, has indicated that he will continue to act cautiously and give ample warning about the US central bank’s plan to “cure” bond purchases.

The Fed said it would need to see “more significant progress” toward its goals to start slowing the expansion of its balance sheet. While this benchmark has been met with respect to inflation, the labor market recovery has been less robust and filled with uncertainty.

Moreover, Fed officials do not want to repeat the experience of the 2013 “taper tantrum” – the massive sell-off in Treasury debt over Fed plans to end quantitative easing in the wake of the financial crisis.

“If you’re the one making the decision like Powell, 2013 will probably be a big year for you — maybe even bigger than it should be. You don’t want to be the owner of another tantrum,” said Jeremy Stein, the Harvard economist and Federal Reserve governor at the time. That’s definitely on their minds.”

The US central bank indicated that the curtailment of asset purchases will not be controlled by any predetermined schedule, but by the development of the economy. It has set a higher benchmark for raising interest rates from nearly zero, where they have been since the start of the pandemic.

The Fed is in a relatively comfortable position with the lower discussion approaching, given the calm in financial markets. Stock prices are trading near all-time highs, and 10-year Treasury yields have fallen in recent weeks, even with inflation data showing more-than-expected price increases.

They made the markets believe that these hyperinflation figures are fleeting. This is exactly what they were hoping for. “They made it happen,” said Randall Kruszner, a professor at the University of Chicago Business School and a former governor of the Federal Reserve.

“This gives them a lot of runway to try to build expectations very gradually [on tapering]Have discussions and debates. And then when the time comes, start moving.”

But Powell will also be aware that the Fed cannot move too slowly in tapering terms. He risks being criticized for complacency if recovery picks up more quickly than expected, and fears of overheating begin to materialize.

It’s just going from emergency adjustment to very easy monetary policy. . . “It’s time to start landing,” said Rick Reeder, chief global fixed income investment officer at BlackRock. “The markets will feel so much better knowing that the seatbelt sign is on and we can start to fall.”

Ian Shepherdson of Pantheon Macroeconomics said markets should be “fairly resilient” in the face of a tapering Fed.

“It is now much more difficult to justify continuing annual quantitative easing rates of up to a trillion dollars when it is clear that the economy is recovering strongly,” he said.

“Fiscal policies are very loose and fundamentals are much stronger than they were in 2013 when the echoes of the 2008 crash were still very loud. So this is a different planet.”

Stein said moving aggressively toward taper has its own risks. This could undermine the Fed’s message that inflation is under control and Labor market It is far from a complete recovery.

“The Fed was trying to make the case, I think reasonably convincingly, that a lot of this inflation is temporary, and there’s really nothing to be alarmed about. The danger is that if they move tapering now, the market is taking this as a sign that they’re They are starting to see something more permanent about inflation.

As recently as April, Powell insisted that the Fed was not even considering a taper discussion, but in recent weeks senior central bank officials have indicated that the central bank would be willing to move forward with the discussion at upcoming meetings.

Even if tapering is not an official agenda item at the FOMC this week, the first discussions on it are expected on Tuesday and Wednesday.

There are a lot of details to iron out, including the timing and terms of tapers, as well as the speed and composition of the drawdown in asset purchases. Some economists are calling for the Fed to reduce the pace of buying mortgage-backed securities before buying Treasuries, given the booming housing market.

But Powell is unlikely to reveal many details of the plan until the economic picture becomes clearer, likely not before the August Jackson Hole conference.

“There will be acknowledgment that they are starting to have a conversation about what the potential path to asset purchases will look like. But they will reiterate that it will be some time before more significant progress is made,” said Michelle Meyer, chief economist at Bank of America.

“This will make it clear that they are responsible, that they are trying to plan for the future.”

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