An undisclosed number of American central bankers expect the Federal Reserve to downsize the extensive bond purchase program earlier than previously expected.
This emerges from the recently published minutes of the central bank meeting in mid-June.
The central bank buys $ 120 billion in government and mortgage bonds every month as part of its “quantitative easing” policy to stimulate the economy.
Winand von Petersdorff-Campen
Business correspondent in Washington.
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Various participants expect that the circumstances under which the reduction in purchase programs appears necessary could arise earlier than previously thought.
According to the protocol, other central bankers warned against taking too fast steps.
You asked for patience in the face of the uncertainty in the economic data.
The latest labor market data indicated that the economy still needed monetary policy support.
House prices soared
Some Fed bankers consider the purchase of mortgage-backed securities in particular to be worth discussing. They highlighted the benefit of scaling back the program that it would take pressure off the overheating housing market. House prices have risen particularly sharply in the United States over the past twelve months. Against this background, they advocated reducing monthly mortgage bond purchases earlier than government bond purchases. The US Federal Reserve is currently buying $ 40 billion a month in mortgage bonds.
The suggestion, however, met with resistance from central bankers. Some warned against such a step. Because the bond purchases served to improve financial conditions that went beyond the housing market. The central bankers agree that a possible slowdown in the purchase program needs to be well prepared. It could be necessary if inflation rises faster than previously expected or if maximum employment in the country is reached faster than currently forecast.
The statement shows how strongly the “Taper Tantrum” of 2013 dominated the thinking and acting of central bankers. At that time, the Fed chairman Ben Bernanke, who was in office at the time, surprised the markets by saying that a slowdown in the purchasing program might be necessary. This had led to violent reactions in the bond markets. The current minutes show the uncertainty of the central bankers about the development of the economy in general and the course of inflation in particular. They still expect that the most recent increases in inflation, some of them sharp, will be temporary. Production bottlenecks are blamed for this. Companies occasionally lack both materials and people.
In fact, the American economy has around 9.5 million job vacancies that it does not seem to be able to fill quickly, even though there are almost as many people who are officially unemployed.
In addition, there are millions more of working age who are not recorded by the statistics.
Fed bankers expect this mismatch to ease as the pandemic-related health threats diminish, childcare is regulated and employers show more commitment in the fight for workers.
Some meeting participants fear that inflation expectations could slide if general inflation remains high for longer.
Look at the job market
At the March meeting, most central bankers had forecast that they would not touch key interest rates, which are currently close to zero, by the end of 2023, but many now expect interest rate hikes in the year after next. The Federal Reserve's preferred rate of inflation, PCE, rose by 3.1 percent year-on-year in April and 3.4 percent in May. That was more than it had been in 29 years. The Fed's standstill policy is the result of last year's monetary policy reform.
The Fed is sticking to its inflation target of 2 percent, but now as an average. This means that after years of falling below the target, it will now be tolerated for a while that inflation is higher than 2 percent. However, the Fed has not specified how long this tolerance will last. Fed Chairman Powell had indicated that he saw the inflation target as achieved. This could suggest that the next monetary policy moves will depend on progress in the labor market. However, the data situation there is uncertain. The official statistics show an unemployment rate of 5.8 percent. However, the Fed puts underemployment much higher. Central bankers say that low-wage earners and members of minorities in particular are still left behind.In the last upswing shortly before the outbreak of the pandemic, they had benefited particularly strongly. Back then, in the best months, the unemployment rate was 3.5 percent.