Federal Reserve officials are preparing to slow the central bank’s massive purchases of government-backed bonds, the first step towards a more normal monetary policy setting as the economy recovers from the pandemic, and notes from their recent meeting shed light on that political debate about when? that should happen.
Minutes of their July 27-28 meeting showed that Fed officials generally thought they would soon reach their standard for slowing bond purchases – “significant further progress” toward the central bank’s maximum employment and inflation targets.
“Most” of them “believe that the standard set in the Guidelines for the Asset Acquisition Committee could be reached later this year,” the press release said. But exactly when remained a question of active debate.
Some officials at the meeting urged the Fed to move earlier, as the report from Wednesday’s meeting showed, while others insisted they will have to wait.
“Some” officials wanted to curb bond purchases soon to protect themselves from the risk of higher inflation, and “some” were concerned that sustained large purchases could pose risks to the financial system. But “some” others advocated a slower process, stressing that rising cases of delta coronavirus posed risks to the economic outlook, and “several” feared that inflation – although high today – would return in the years to come could sink to uncomfortably low levels. “Several” pointed to significant persistent uncertainties such as when workers would return to their jobs.
The snapshot of the Federal Open Market Committee’s deliberations comes ahead of the Fed’s closely watched annual meeting, a business symposium in Jackson Hole, Wyoming, due next week. Fed chairman Jerome H. Powell will be speaking at the event, and many investors expect him to be able to provide guidance or details on the central bank’s upcoming policy move.
The Fed continues to hold rates near zero and plans to do so until the labor market is fully healed, which means that monetary policy will continue to support the economy even if bond purchases weaken. Fed officials have suggested that they might advocate a rate hike in 2022 or 2023, depending on the pace of the recovery.
Mr. Powell and his colleagues work against a complicated background as the economy is growing rapidly and inflation and asset prices are skyrocketing, but the labor market recovery remains incomplete.
Prices rose 4 percent over the year through June, based on the Fed’s preferred inflation measure, as the categories hit by the pandemic drove the increases well above the central bank’s average target of 2 percent. At the same time, compared to the employment level at the beginning of the pandemic, in February 2020, there is still a shortage of almost 7 million jobs.
Some officials, eager to start curbing bond purchases soon, have insisted that moving early will allow the Fed to be more flexible in increasing borrowing costs. The Fed is currently buying $ 120 billion a month.