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Powell: "Fed Discussing Buying Bonds" - Zeal Capital Market

Powell: “Fed Discussing Buying Bonds”

01-12-2021 11:36

ZFX - Federal Reserve Chair Jerome Powell indicated on Tuesday that the central bank could step up its efforts to boost the economy as it battles rising inflationary pressures.

In an appearance before a Senate committee, the Fed chief said he thought reducing the pace of monthly bond purchases could move faster than the $15 billion-a-month schedule announced earlier this month.

Powell said he expected the issue to be discussed at the December meeting.

“At this point, the economy is very strong and inflationary pressures are higher, and therefore, in my view, considering closing our asset purchase taper, which we actually announced at our November meeting, perhaps a few months earlier, is the right thing to do. he said. “I hope we will discuss that at our next meeting.”

The initial reduction schedule will see bond purchases complete sometime in June; if the committee chooses to speed things up, it could mean an earlier close in the spring, giving the Fed leeway to raise rates at any time afterward.

Stocks fell following Powell's comments, while government bond yields rose. The statement added to concerns over an already-nervous market over the new strain of the coronavirus emerging, although early indications were that the variant is less dangerous than the previous versions.

The Federal Open Market Committee, which sets monetary policy including interest rates and the Fed's efforts to boost activity through bond purchases, said after its November meeting that the pace would be cut by $15 billion a month to $10 billion in Treasuries and $5 billion in mortgage-backed securities.

However, the post-meeting statement indicated that it would be for November and December but noted that it was "ready to adjust the pace of buying if warranted by changes in the economic outlook."

Minutes from the meeting show that committee members are ready not only to cut asset purchases but also to start raising interest rates if inflation persists.

The Fed has bought at least $120 billion per month, $80 billion in Treasuries and $40 billion in MBS.

Powell said bond purchases, which have added $4.5 trillion to the Fed's $8.73 trillion balance sheet, have "supported economic activity." However, he said economic progress had removed the urgency of the program, often referred to as quantitative easing.

“The need for that is clearly easing as the economy continues to strengthen, as we see continued significant inflationary pressures, and that's why we announced that we're going to cut back, and that's why we're now saying that we're going to talk a little bit more quickly at our next meeting.” he said.

He did not indicate how much the taper would accelerate. Citigroup economists said the Fed could double its reduction to $30 billion a month.

Powell has stressed that the cuts should not be seen as an indication that a rate hike is imminent.

Markets are currently forecasting at least two quarter-percentage point gains in 2022 and perhaps a third in December, while September projections from Fed officials suggest a less aggressive schedule. The projections will also be updated in December.

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