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The Fed Will Start Tapering Its Bond Purchases This Month

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The Federal Reserve thinks that the time to withdraw pandemic support is nearing. The US central bank came out of its latest policy meeting and announced its latest decisions regarding its pandemic support.

First, it will continue to leave interest rates to near zero. Then, it will begin tapering its bond buying activity beginning this month. 

RELATED: Federal Reserve Looking To Start Reducing Asset Purchases

Fed To Unwind Its Pandemic Support Beginning This Month

Federal Reserve with interest rate cut concept-Bond Purchases

The latest Federal Reserve meeting confirmed that it will start to scale back its pandemic support. More importantly, Wall Street awaited to hear what the Fed will do in order to address the growing problem that is inflation.

The spike in prices of consumer goods, oil, housing, and transportation is dampening the great American economic comeback. 

However, Chairman Jerome Powell continued to describe the present inflation as “transitory” in nature. However, he acknowledged that disruptions to the supply chain also helped shoot prices higher than expected.

Many hoped that the agency will finally agree that the higher prices are here to stay for the long term. Now, they’re unsure of what to make of it given the Fed’s statement. “If this inflation isn’t transitory, what is it?” asked Zhiwei Ren of Penn Mutual Asset Management.

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Many Don’t See Inflation As Transitory Despite Powell’s Insistence

Bankrate chief financial analyst Greg McBride is wondering why “transitory” is still getting bandied about. “I don’t know if the word ‘transitory’ is going to be used as frequently.

The Fed has acknowledged this could persist longer and at higher levels, than they originally expected,” he said. Meanwhile, Keith Buchanan, Globalt Investments portfolio manager, said the Fed still needs to face the “more sticky” nature of the current inflation pressures.

Even within the Federal Reserve, some are doubting whether the current inflation is really transitory. Atlanta Fed President Raphael Bostic called the word “transitory” a “dirty word” in a virtual speech last week.

If the higher prices driven by the supply chain disruptions continue, then by definition, “the forces are not transitory.”

Fed To Taper Off Bond Purchases Beginning This Month

The second major component of the Fed’s pandemic support is its $120 billion monthly bond purchases. Since June 2020,  the agency purchased $120 billion in bonds every month to maintain liquidity.

The purchases consist of $80 billion in Treasuries and $40 billion in mortgage-backed securities. Last Wednesday, Powell said that the Fed will reduce bond purchases by $10 billion and $5 billion respectively this month. Moving forward, the agency will

continue reducing the purchases by increments. However, Powell clarified that the Federal Reserve can “adjust the pace of purchases if warranted by changes in the economic outlook.” 

As a result, many think that bond purchases will continue until next year. Until when exactly is a matter of speculation.

James Bullard, the regional Fed president in St. Louis, suggested that the Feds will be done with bond purchases by the first quarter of 2022. However, most market players believe the Fed will move slowly and conclude by June. 

Watch the CNBC Television video reporting that the Federal Reserve will begin its taper this month:

Do you agree with the Federal Reserve’s decision to start withdrawing their pandemic support?

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Do you agree with the Federal Reserve’s decision to begin withdrawing their pandemic support measures?

Specifically, do you agree with keeping interest rates to near-zero levels while tapering bond purchases? Do you think these moves will help control inflation?

Let us know what you think about the current economy. Share your comments below. 

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