Federal Reserve officials now acknowledge the need to reduce asset purchases. During their July meeting, Fed leaders indicated that they’re on schedule to start reversing their easy money policies later this 2021.
However, they have yet to determine exactly when to pull back their fiscal policies that supported the US during the height of the pandemic.
Easing Up On Asset Purchases
With the US economy growing faster than anticipated earlier this 2021, Fed officials are now trying to figure out the best time to pull back on their relaxed fiscal policies. This includes purchasing around $120 billion of Treasury and mortgage securities every month.
In the minutes of their Jul\y 27-28 meeting released Wednesday, a consensus among Fed officials is forming. Many are in agreement that they will soon need to start reducing their monthly asset purchases.
“Most participants noted that, provided that the economy was to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes read.
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Less Asset Purchase: Higher Interest Rates
Reducing asset purchases puts the Fed in a better position to raise interest rates, especially if the economy continues to grow stronger. However, there are some Fed officials who advised the group to wait until next year. They want to see better evidence that the job market is totally free from the effects of the pandemic.
The Fed also said they expected a spike in the inflation rate. This will temporarily happen given the issues involving a decimated supply chain.
However, the Fed underestimated the economy’s growth rate, which led to wilder price increases. In fact, the Fed’s preferred inflation gauge rose 3.5% in June, a 30-year high.
Inflation Is Transitory
During the same meeting, the Fed maintained that this year’s inflation woes will prove transitory.
It also admitted that the risks of higher-than-expected inflation exceeded the risks of lower-than-expected inflation. As soon as the supply chain normalizes and the pandemic eases, expect the uninterrupted flow of goods and services. This will help ease price pressures.
Last year, the Fed cut interest rates to near zero and began an aggressive purchase of $80 billion a month in Treasury securities and $40 billion in mortgage securities every month. Their goal is to set inflation rates that average 2% over time.
They also want to see the labor market activity and in step with full employment. At this point, many Fed officials think the agency met its inflation targets. However, they feel the labor market has yet to achieve its benchmark. As a result, many officers want to see more hiring before scaling back asset purchases.
Next Meeting On Sept 21
The Fed’s next meeting will happen on September 21-22. Already, several Fed officials declared they will propose reducing bond purchases, especially if hiring continues to remain strong.
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However, the previous minutes do not show a consensus. As a result, a proposal for bond purchase reduction will more likely happen after the Fed’s November 2-3 meeting.
Watch the Yahoo Finance video reporting on an Economist reaction to the Fed minutes: ‘Tapering is not tantamount to tightening’:
Do you agree that the Fed needs to start reducing asset purchases in anticipation of a stronger economy? Or, do you think that the Fed needs to continue with their stimulus programs until the pandemic subsides?
Let us know what you think about the Federal Reserve’s decision to scale back on asset purchases.