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Federal Reserve announces plan to slow bond buying program

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Federal Reserve announces plan to slow bond buying program

Federal Reserve officials took their first major steps toward withdrawing monetary policy support as the economy recovered from the pandemic’s disruptions and inflation rose sharply, making plans to slow their asset-buying program.

Referring to its policy, the Fed said in a statement issued on Wednesday that “since last December the economy has made substantial progress toward the Committee’s goals, the Committee decided to begin reducing the monthly pace of its net asset purchases.” Is.” Group establishment.

The central bank is buying $120 billion in mortgage-backed securities and Treasury bonds each month to keep cash flowing through the financial system, but will cut $15 billion per month from this month, it said. While it will slow those purchases, the Fed’s core policy interest rate – which affects the cost of borrowing in the economy – remains set at nearly zero.

Officials have indicated they will use their policy rate, which is the more powerful of the Fed’s instruments, to aid recovery until the labor market fully recovers. But that plan could be pushed forward by rapidly rising prices. The Fed is tasked with achieving full employment and keeping price gains low and steady, and if inflation does not subside next year as policymakers expect, they will seek to slow demand and keep inflation under control. may decide to raise interest rates.

Prices rose 4.4 percent during September, well above the Fed’s 2 percent target. Prices have tumbled in recent months after popping up this summer, but it’s possible that rising rents, rising labor costs and continued supply chain disruptions could keep them high in the coming months.

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In their November policy statement, officials noted the rapid pace of price increases, but predicted they would fade.

“Inflation has risen, which largely reflects factors that are expected to be temporary,” he said. “The supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to massive price increases in some sectors.”

Fed officials are prepared to endure a temporary bout of inflation as the economy reopens from the pandemic, but if consumers and businesses expect consistently higher prices, it could lead to trouble. High and precarious inflation that persists makes it difficult for businesses to plan and can shun wage growth for workers who lack bargaining power.

Fed Chairman Jerome H. Powell has indicated that he and his allies will react if they believe the bullish price gains will continue.

With the reduction in bond buying now, they will become more nimble going forward. Many executives will not want to raise interest rates while they are still making major bond purchases, as doing so would mean their two instruments are working against each other. If a rate hike is deemed necessary, early termination of the procurement program will put central bankers in a position to bear the cost of borrowing.

Fed officials have tried to separate the path of slow bond purchases, commonly referred to as “dilution”, from their plans for interest rates. Still, investors expect rates to start rising in mid-2022, market pricing shows.

But there are potential costs of incurring the cost of borrowing early or aggressively. Many workers are yet to return to the job market after a drop in employment amid the pandemic lockdown. Some workers may retire, but many who are now on the edge of the labor market may return to looking for jobs as child care issues are resolved and health concerns subside.

If the Fed slows the economy before it does, it could be harder for them to move to new jobs, leaving the economy with less capacity and lower-paying families.

This is a developing story. Check back for updates.

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