The US Federal Reserve is keeping its foot on the gas pedal, despite the market’s recent volatility. But with inflation creeping up and interest rates at historic lows, some economists are wondering if this is a good idea.
The federal bank reserve is in a precarious position. Despite the fact that they are not in danger of failing, they are still experiencing price hikes and the ghost of 2013’s market meltdown looms over them.
The Federal Reserve is widely expected to disclose plans to reduce its bond-buying this year, according to economists. Credit… The New York Times’ Stefani Reynolds
Even as the economy recovers and inflation rises, Federal Reserve policymakers are meeting in Washington this week with monetary policy still in emergency mode.
Economists anticipate the Fed’s post-meeting statement to remain unchanged at 2 p.m. Wednesday, but investors will be watching for any clues from Fed Chair Jerome H. Powell during a following press conference on when — and how — policymakers may begin to withdraw their economic assistance.
This is because Fed officials are discussing their future plans for “tapering,” the commonly used word for reducing monthly purchases of government-backed securities. Slowing the bond purchases, which are intended to keep money flowing through the economy by boosting lending and spending, would be the first step toward returning policy to a more normal stance.
The taper discussion is dominated by large and sometimes contradictory factors. Inflation has accelerated faster than many Fed policymakers anticipated. Those pricing pressures are anticipated to subside, but the possibility that they may persist is a cause of concern, heightening the need to devise some kind of exit strategy. At the same time, the employment market is far from recovered, and the increasing prevalence of the Delta coronavirus strain implies that a pandemic is still a possibility. Mistakes in policy may be expensive.
Here are a few important points to remember about the bond purchases, as well as some critical facts to keep an eye on on Wall Street:
Each month, the Fed purchases $120 billion in government bonds, including $80 billion in Treasury notes and $40 billion in mortgage-backed securities.
Economists believe the central bank will disclose intentions to reduce purchases this year, perhaps as early as August, before reducing them later this year or early next year. A “taper” is the term used on Wall Street to describe this slowdown.
The timing of the taper is a point of contention among policymakers. Because the housing market is growing, some experts believe the Fed should first reduce mortgage debt purchases. Others have claimed that purchasing mortgage securities has minimal impact on the housing market. They’ve suggested or said that they like to taper both kinds of purchases at the same time.
The Fed is treading carefully for a reason: Investors panicked in 2013 when they learned that a comparable bond-buying program implemented following the financial crisis would shortly come to an end. Mr. Powell and his team do not want a repeat performance.
Bond purchases are one of the Fed’s policy instruments for lowering longer-term interest rates and moving money throughout the economy. To keep borrowing costs low, the Fed also sets a policy interest rate, known as the federal funds rate. Since March 2020, it has been around zero.
The first step toward shifting policy away from an emergency situation has been made plain by central bankers: reducing asset purchases. Increases in the funds rate are still a long way off.
As the economy recovers from the epidemic, the Federal Reserve is discussing whether and how to reduce its massive asset purchases, the first step toward exiting its emergency posture. The hole that the coronavirus ripped in the job market continues to loom enormous.
The arguments for withdrawing assistance as soon as possible are self-evident. The economy is booming, thanks to massive government expenditure. Inflation has accelerated, and although this is only anticipated to be a transitory condition, the price rise has been unexpectedly rapid.
The employment situation, on the other hand, is a different story. When compared to February 2020, around 6.8 million jobs are absent from company payrolls.
The central bank has every reason to believe that the economy will continue to improve after it reduces (or perhaps eliminates) bond purchases. Although asset values may decrease somewhat and longer-term interest rates may increase little, the Fed’s policy rate remains near rock bottom, ensuring that borrowing costs remain low. Government expenditure is still making its way through the economy. Many people have a lot of money and are ready to spend it.
The goal for Fed Chair Jerome H. Powell and his colleagues is to avoid crashing the economy by shocking investors and causing markets to sway, lending to dry up, and growth to slow more quickly than expected.
The current condition of the employment market is an additional reason to act with caution. It may be a lengthy journey back to full employment if the Fed sends an excessively aggressive signal to markets, leading financial conditions to tighten at a time when millions of people are still looking for work.
The danger is heightened by the fact that a coronavirus variation is causing an outbreak in several nations, including the United States. While it is unknown how big of a barrier the Delta variety presents to development, it has served as a reminder that the pandemic is still a danger.
For the time being, the Fed is treading carefully as it considers when and how to begin weaning itself off its policy assistance, which it intends to do only when the economy has achieved “substantial” additional progress. The assumption is that a steady trickle of information will keep any market-shaking shocks at bay.
When it comes to interest rates, the central bank has set an even more ambitious and patient objective. Officials want to see the job market return to full employment before raising borrowing rates, unless there is a major surprise in which financial risks or inflation increase alarmingly.
“They’d prefer to wait,” said Kathy Bostjancic, Oxford Economics’ senior U.S. finance economist. Officials were balancing the need to keep longer-run inflation under control against the numerous positions that remained unfilled — and hoped that pricing pressures would be short-lived, she said.
Ms. Bostjancic said, “They’re relying on the T-word.” “Transient.”
However, when that “full employment” objective will be reached is a big question mark. Since the beginning of the epidemic, many employees have retired, and it is unclear if they will return to work, even if possibilities are abundant.
However, the participation rate for prime-age workers — the percentage of individuals aged 25 to 54 who are working or actively searching for employment — has plummeted since last year, and Fed policymakers are hoping for a rebound. Child care problems and pandemic anxiety may be keeping potential employees at home.
The Fed is taking a wait-and-see approach to see what the labor market can accomplish.
Mr. Powell recently told legislators, “It would be a mistake to act prematurely.” “The dangers may change at some time, but the risks to me are obvious right now.”
Reno-Tahoe International Airport in Reno, Nevada, is looking for assistance to expand its fuel supply. Credit… Associated Press/Martha Irvine
On Tuesday, the airline industry took the rare step of requesting that federal authorities assist in increasing jet fuel supply at Reno-Tahoe International Airport, one of many smaller airports in the West that have been affected by shortages.
Airlines for America, a trade group, and World Fuel Services, a fuel supplier to airlines, told the Federal Energy Regulatory Commission in a petition that the scarcity of jet fuel had grown so severe that airlines may be forced to cancel passenger and cargo flights. Low gasoline supplies are expected until Labor Day, according to the trade organization.
The airline industry is requesting that the commission require pipeline owners to supply additional jet fuel to the Reno airport by temporarily prioritizing those supplies above other fuels like as gasoline and diesel.
The post-pandemic travel boom, a scarcity of truck drivers, and increased demand for jet fuel by firefighting teams attempting to put out numerous major wildfires with planes have all contributed to fuel shortages at smaller airports, mostly in the West.
At the same time, due of the appeal of domestic vacation locations like Lake Tahoe, which is less than an hour away by vehicle from the Reno airport, airlines have boosted flights to destinations like Reno over 2019 levels.
Another reason in the shortages, according to Tom Kloza, worldwide head of energy research at the Oil Price Information Service, is difficulties at refineries in Western states that convert crude oil into jet fuel, gasoline, and diesel. Many are not functioning at full capacity due to unplanned maintenance and the inability of those industrial facilities to operate properly due to previous heat waves.
Mr. Kloza said, “It’s unique, but it’s basically confined to Western geography.”
In recent days, airlines operating out of a number of airports in Nevada, along the Pacific Coast, and in and around the Rocky Mountains have been forced to postpone or cancel flights. The situation is likely to deteriorate, according to the Oil Price Information Service, especially if the flames continue into August. Other airports servicing Sacramento, Boise, Idaho, and Spokane, Washington, have reported “hand-to-mouth supplies of jet fuel,” according to the information service.
Mr. Kloza said, “Transporters emphasize that every regional airport that is not served by pipeline is trying to obtain enough gasoline to meet strong summer demand.”
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