The Federal Reserve has announced that it could soon reduce its bond purchase program.

The program could be scaled down as early as next month, provided the economy makes the desired progress, said Fed Chairman Jerome Powell at the press conference after the Fed meeting that ended on Wednesday. 

Winand von Petersdorff-Campen

Business correspondent in Washington.

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The US Federal Reserve has increased its holdings of government and mortgage bonds by $ 120 billion every month since the pandemic began.

Last December, the Fed announced that it would only reduce its quantitative easing program once substantial progress had been made towards the central bank's goals of price stability and maximum employment.

Now the Fed sees itself much closer to these goals.

Powell said, "If progress continues across the board as expected, the committee (Fed) has decided that a reduction in purchases may soon be appropriate."

No sign of a reversal in key interest rate policy

The central bankers are communicating cautiously in order to avoid shaking the financial markets.

In 2013, the then Fed chairman Ben Bernanke triggered the hustle and bustle of the bond markets with the surprising announcement of a quantitative easing reduction.

Powell emphasizes that a possible reduction in quantitative easing will be carried out at a moderate pace and that it is not a signal for a reversal in the key rate policy.

The key interest rates will remain close to zero at the old level after the session.

Only when maximum employment has been reached and the inflation rate has exceeded the target of two percent for a long time will the American central bankers consider adjusting key interest rates.

According to Powell, the recent higher inflation continues to be shaped by factors that will lose their influence in the foreseeable future. He highlighted problems in the procurement of microchips, which noticeably impacted production in the vehicle industry. The idea that inflation will fall back into the two percent region in the coming year is also reflected in the so-called projections, in which every central banker puts his predictions on the development of inflation, unemployment, growth and the key interest rate on paper. On average, central bankers expect inflation to fall from 4.2 percent to 2.2 percent in the coming year, which is only slightly above the June projection. The projections for core inflation excluding food prices and energy prices are roughly the same.The growth forecast, however, with a large plus of 5.9 percent this year, is weaker than the bankers assumed in June. Main reason: The delta variant of the corona virus dampens the desire to go out.

Despite an official unemployment rate of 5.2 percent, which is low by international standards, Powell still sees plenty of scope for more employment. He referred to the very high demand for labor and the comparatively low propensity to work, which reflects the proportion of those in employment in the labor force. Unemployment among low-wage earners and blacks is still high. In the projections, unemployment will shrink to 3.8 percent in the coming year. According to the projections, the key interest rate could rise to one percent by the end of 2023, which would require three normal rate hikes.

Powell is concerned about the polarized debate in Congress over the debt ceiling. If politicians fail to raise or suspend the debt ceiling, the US Treasury Department will not be able to pay its bills. Powell warned that nobody should have the illusion that the Fed could then protect the economy from the unforeseeable consequences.      

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