The Federal Open Market Committee of the Federal Reserve (FOMC) announced this Wednesday at the close of its monetary policy meeting that it will begin to reduce its debt purchases. The process, commonly known as tapering, will cut $15 billion a month from the amount of assets currently gobbled up by the US central bank.
“As the economy has continued to make progress toward the Committee’s targets since last December, the FOMC decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasuries. and in 5,000 million dollars in the case of securities backed by mortgages”, determined the statement voted unanimously by the 11 members of the FOMC.
Since the start of the pandemic, in March of last year, the Fed has absorbed a total of 120,000 million dollars a month in Treasury bonds and mortgage-backed assets, almost doubling the size of its balance sheet, which currently exceeds 8.5 billions of dollars.
In this way, as explained by the Fed, purchases of Treasury bonds will be reduced to 70,000 million dollars and those of mortgage-backed securities to 35,000 million dollars per month at the end of November. In early December, those amounts will be cut to $60 billion and $30 billion a month, respectively.
The FOMC thus hopes to continue gradually reducing the pace of purchases, based on progress towards its double objective, which seeks price stability at an average level of 2% for inflation in addition to full employment.
Of course, the FOMC does not want to get its fingers caught and considers that similar reductions in the pace of net asset purchases are likely to occur each month, but says “be prepared to adjust the pace of purchases if warranted by changes in economic prospects”.
These purchases and the holdings of securities on the Federal Reserve’s balance sheet will continue to promote a smooth functioning of the market and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Improvement of the economic situation
Now that the US economy is shaking from the impact of covid-19 and inflationary pressures are showing, senior Fed officials have unanimously decided to phase out their assisted breathing. The Fed highlights in its statement, the advances in vaccination and the strong support of fiscal policy as some of the factors that have made economic activity and employment continue to strengthen.
From his point of view, the sectors most affected by the pandemic have improved in recent months, although the rebound generated by the Delta variant in the summer made a dent in the recovery.
As far as inflation is concerned, the FOMC notes that it “is high”, largely reflecting factors that the US central bank still sees as transitory. The statement mentions supply and demand imbalances related to the pandemic and the reopening as the main driver that has contributed to a considerable increase in prices in some sectors.
Even so, it emphasizes how general financial conditions remain accommodative, partly as a consequence of political measures to support the economy and the flow of credit to US households and companies.
In this regard, the FOMC maintained the target range for the federal funds rate between 0% and 0.25% and expects it to be appropriate to maintain this range until labor market conditions have reached levels consistent with full employment. and inflation is on track to moderately exceed 2% for some time.
Don’t worry about salary increases
In the subsequent press conference, Powell responded to one of the big questions about current inflation: whether a vicious price-wage circle has been unleashed. The president of the Fed assures that this is not the situation. “Increasing wages doesn’t concern us,” he said. In his opinion, the pattern and amount of the increases do not yet indicate the existence of a negative spiral.
“This is not the case with the traditional Philips curve. It is not the classic situation where wages go up because the labor market is very tight, the lack of supplies is to blame. We do not believe that there is a choice between creating employment and create inflation, although we have to be aware of the risks,” he said.
“We have to wait for the labor market to heal to know where we are”
Powell insisted on the need to wait to see if the effects of the pandemic are reduced in the coming months or not before moving rates. “We accept responsibility for inflation in the medium term. And right now we do not have price stability or full employment. But we are not going to raise rates yet because we want to wait for the labor market to recover when the effect of the variant wears off. Delta”. Although he accepts that they will not wait for inflation to become permanent. “Transient does not necessarily mean that it will last a short time, it means that there is an external event with an expiration date that is causing it. But we do not know exactly how long it will last,” he pointed out. “We will have to wait for the first half of next year to know the characteristics of the labor market.”
For the central bank, the problem is that the pandemic has shaken the labor market so sharply that there is a high demand for unfilled positions and, at the same time, a large number of unemployed workers. “We have to wait for the labor market to heal to know where we are, it is possible that there will be a great job creation when the people who have left the labor market due to the coronavirus return.” At the same time, the drop in spending on services such as travel or restaurants, due to the restrictions of the pandemic, has triggered demand and spending on goods, which is what is causing shortages and inflation. “When more people start spending on services and demand for goods goes down, and the situation heals, then we will know the true state of the economy.”
Facebook Comments
Disqus