Federal Reserve announces plan to slow down its bond purchase program

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Federal Reserve officials took their first major step in withdrawing monetary support as the economy recovered from pandemic disruptions and inflation continued to rise sharply, and put forward a plan to slow their asset purchase program.

“Given the significant further progress that the economy has made towards the committee’s goals since last December, the committee has decided to slow the monthly pace of its net asset purchases,” the Fed said in a statement released on Wednesday, referring to its policy . Set group.

The central bank buys $ 120 billion worth of mortgage-backed securities and government bonds every month to help keep money flowing through the financial system. While it will slow those purchases, the Fed’s main interest rate – which affects the cost of borrowing across the economy – remains near zero.

Officials have signaled that they will use their policy rate, which is the Fed’s stronger tool to fuel the recovery until the labor market is more fully healed. But that plan could be ruined by rapidly rising prices. The Fed’s job is to get full employment and keep price gains low and stable, and if inflation doesn’t ease up as policymakers anticipate next year, it could decide to hike rates to curb demand and inflation to keep in check.

Prices rose 4.4 percent over the course of the year through September, well above the Fed’s 2 percent target. Price hikes have slowed in the last few months after rising this summer, but it’s possible that rising rents, rising labor costs, and ongoing supply chain disruptions could keep them high for the months ahead.

In their November policy statement, officials noted the rapid pace of price increases but predicted that they would slow down.

“Inflation is high, largely reflecting factors that are expected to be temporary,” they said. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to significant price increases in some sectors.”

Fed officials are ready to tolerate a temporary surge in inflation if the economy reopens from the pandemic, but if consumers and businesses expect prices to continue to rise, it could spell trouble. Persistently high and unpredictable inflation would make planning difficult for companies and could erode wage increases for workers lacking bargaining power.

Fed chairman Jerome H. Powell has signaled that he and his colleagues would react if they believed the rapid gains continued.

The slowdown in bond purchases will make them more agile in the future. Many officials would not want to hike rates while they are still making large bond purchases because that would mean their two instruments are working against each other. Completing the purchase program earlier will enable central banks to raise the cost of borrowing if an interest rate hike is deemed necessary.

Fed officials have attempted to separate the slow bond buying path commonly known as “tapering” from their interest rate plans. Still, investors increasingly expect the rate hikes to begin in mid-2022. Market price suggests.

However, there are potential costs if borrowing costs are raised early or aggressively. Many workers have yet to return to the labor market after employment plummeted amid the pandemic lockdown. Some employees may have retired, but many people who are now on the fringes of the job market may return to job hunting once childcare issues are resolved and health concerns subside.

If the Fed slows the economy down beforehand, it could make it harder to find new jobs, leaving the economy with less potential and families less paychecks.

This is a developing story. Check back for updates.


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