The tapering is now official: the Fed will reduce its purchases by 15,000 million dollars a month

The Federal Open Markets Committee of the Federal Reserve (FOMC) announced this Wednesday at the close of its monetary policy meeting that it will begin to reduce its debt purchases. The process, commonly known as tapering, will cut by $ 15 billion a month the amount of assets currently gobbled up by the US central bank.

“As the economy has continued to advance toward the Committee’s targets since last December, the FOMC decided to start reducing the monthly rate of its net asset purchases. in 10 billion dollars in the case of Treasury securities and in 5,000 million dollars in the case of mortgage-backed securities, “determined the statement voted unanimously by the 11 members of the FOMC.

Since the start of the pandemic, in March of last year, the Fed has absorbed a total of $ 120 billion in Treasury bonds and mortgage-backed assets to nearly double the size of its balance sheet, which currently exceeds $ 8.5 trillion.

In this way, as explained by the Fed, purchases of Treasury bonds will be reduced to $ 70 billion and mortgage-backed securities to $ 35 billion monthly at the end of November. In early December, those amounts will be cut to $ 60 billion and $ 30 billion a month, respectively.

The FOMC thus expects to continue gradually reducing the pace of purchases, based on progress towards its dual objective, which seeks price stability at an average level of 2% for inflation in addition to full employment.

Of course, the FOMC does not want to get its fingers caught and considers that similar reductions in the pace of net asset purchases are likely to occur each month, but it says “be prepared to adjust the pace of purchases if warranted by changes in net asset purchases. economic prospects “.

These purchases and holdings of securities on the Federal Reserve’s balance sheet will continue to promote smooth market operation and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Improvement of the economic situation

Now that the US economy is shaking off the impact of COVID-19 and showing inflationary pressures, senior Fed officials have unanimously decided to phase out their assisted breathing. The Fed highlights in your statement, advances in vaccination and the strong fiscal policy support as some of the factors that have made economic activity and employment continue to strengthen.

From his point of view, the sectors most affected by the pandemic have improved in recent months, although the rebound generated by the Delta variant in summer made a dent in the recovery.

When it comes to inflation, the FOMC notes that inflation “is elevated”, largely reflecting factors that the US central bank still anticipates as transitory. The statement mentions the supply and demand imbalances related to the pandemic and the reopening as the main driver that has contributed to a considerable increase in prices in some sectors.

Even so, it emphasizes how general financial conditions remain accommodative, partly as a consequence of political measures to support the economy and the flow of credit to US households and companies.

In this regard, the FOMC maintained the target range for the federal funds interest rate between 0 and 0.25% and hopes that it is appropriate to maintain this range until labor market conditions have reached levels consistent with full employment. and inflation is on track to moderately exceed 2% for some time.

No worries about the increase in wages

In the subsequent press conference, Powell answered one of the big questions about current inflation: if a vicious price-wage cycle has been unleashed. The president of the Fed assures that this is not the situation. “The increase in wages does not concern us,” he said. In his opinion, the pattern and amount of the increases does not yet indicate the existence of a negative spiral.

“This is not the case with the traditional Philips curve. It is not the classic situation where wages rise because the labor market is very tight, the fault is the lack of supplies. We do not believe that there is a choice between creating jobs and create inflation, although we have to be aware of the risks, “he said.

“We have to wait for the job market to heal to know where we are”

Powell insisted on the need to wait to see if the effects of the pandemic diminish in the coming months or not before moving rates. “We accept responsibility for inflation in the medium term. And right now we have neither price stability nor full employment. But we are not going to raise rates yet because we want to wait for the labor market to recover when the effect of the variance wears off. Delta”. Although he accepts that they will not wait for inflation to become permanent. “Transitory does not necessarily mean that it will last short, it means that there is an external event with an expiration date that is causing it. But we do not know exactly how long it will last,” he said. “We will have to wait for the first half of next year to know the characteristics of the labor market.”

For the central bank, the problem is that the pandemic has shaken the labor market so abruptly that there is a great demand for unfilled positions and, at the same time, a large number of unemployed workers. “We have to wait for the job market to heal to know where we are, it is possible that there will be great job creation when the people who have left the job market due to the coronavirus return.” At the same time, the fall in spending on services such as travel or restaurants, due to the restrictions of the pandemic, has triggered demand and spending on goods, which is what is causing the shortage and inflation. “When more people start spending on services and the demand for goods falls, and the situation heals, then we will know the true state of the economy.”