By Ann Saphir
– It is hardly a secret by now that the Federal Reserve is going to reduce its support for the U.S. economy soon: starting this month it will likely begin to pare its monthly asset purchases by $15 billion each month until ending them by mid-2022.
That, at least, is the roadmap suggested by the Fed’s post-meeting statements, minutes of its meetings, and remarks from Fed Chair Jerome Powell. It is expected to be spelled out when this week’s policy meeting wraps up Wednesday, although officials may keep options open for speeding or slowing the taper to suit economic needs.
But overall, the Fed has telegraphed what Philadelphia Fed President Patrick Harker says will be a “boring” exit from what is now $120 billion in monthly bond buys.
That is despite the fact that the reductions this time will proceed at about twice the pace as the last time the Fed ended a bond-buying program, in 2014.
It is also a stark contrast to March of 2020, when U.S. authorities were first shutting down parts of the economy to prevent the spread of COVID-19. In response the Fed abruptly cut interest rates to zero, rolled out a raft of emergency lending programs, and began hoovering up trillions in Treasuries and mortgage-backed bonds.
The bond-buying is credited with helping stabilize the financial system and, later, to bolster demand and foster a faster recovery from the sharpest downturn in decades.
More recently some Fed policymakers have questioned its effectiveness and even raised the alarm over its potential harms amid an economy marked by rising inflation and too much demand relative to pandemic-constrained supply. They all agree it should be pared back soon, minutes from the Fed’s last meeting show.
Here is a look back at the arc of the Fed’s pandemic bond-buying program – what policymakers said, what the central bank did, and what’s likely to lie ahead.
(GRAPHIC: In with a boom, out with a … – https://graphics.reuters.com/USA-FED/byvrjrggbve/chart.png)
A CRACK, AND THEN THE FLOODGATES
Fed Chair Powell issued a terse and unusual statement Feb. 28, 2020, as stock markets plunged amid reports of the rapid spread of the novel coronavirus. The Fed, he said, is “closely monitoring developments and their implications for the economic outlook” and “will use our tools and act as appropriate to support the economy.”
Three days later policymakers cut interest rates by half a percentage point. On March 15, they slashed the rate to near-zero, where it has stayed since, and promised to buy “at least” $500 billion of Treasuries and $200 billion of mortgage-backed securities in coming months. Eight days later they shifted to an open-ended pledge to continue buying “in the amounts needed” to smooth markets and aid in monetary policy transmission.
By the end of April and the two-month recession, the Fed’s weekly accountings show they had added $1.4 trillion of Treasuries, and $234 billion of mortgage-backed securities. The central bank’s balance sheet stood at $6.7 trillion, up from $4.4 trillion before the pandemic.
THE STEADY STREAM
By June 2020, the Fed’s bond-buying had settled into a slower rhythm: $80 billion in Treasuries and $40 billion in housing-backed bonds each month, Powell noted at his regular news conference. In its statement the Fed promised “over coming months” to continue to buy bonds “at least at the current pace” to sustain smooth markets and help transmit monetary policy. In September it kept that language and added that the purchases would “help foster accommodative financial conditions” and keep credit flowing to households and businesses.
SETTING THE TEST FOR TAPER
In December 2020, with its balance sheet at $7.4 trillion, the Fed started the clock on the end to its bond buying, promising to keep up the $120 billion a month pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
This language remained unchanged for the statements issued in January, March, April and June of this year.
NEARING THE BAR FOR TAPER
July’s statement acknowledged that “the economy has made progress toward these goals,” and in August Powell said the bar had been met for inflation, and “clear progress” had been made toward maximum employment; it could, he said, be appropriate to start reducing bond buying this year. In its September post-meeting statement the Fed went further: “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” Powell went still further in the news conference that followed, saying the employment test is “all but met” and “we could easily move ahead at the next meeting,” with policymakers supporting a pace of reduction that “will put us having completed our taper around the middle of next year.”
“I do think it’s time to taper.” That’s how Powell put it on Oct. 22, leaving little doubt for the outcome of this week’s meeting. Minutes from the September meeting showed policymakers thought reducing Treasury securities purchases by $10 billion each month and mortgage-backed securities by $5 billion each month would be “straightforward and appropriate.” At that pace, if the taper begins in November, purchases would be phased out completely by June. On Oct. 27 the Fed’s balance sheet stood at $8.6 trillion; at the expected tapering pace, it will be just over $9 trillion when the program ends, twice its pre-pandemic size.
(GRAPHIC: Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)
At some point the Fed is expected to take the next step back to monetary policy normalcy by raising rates, although policymakers are currently divided on whether that will happen in 2022 or 2023.
As for the fate of the balance sheet, even less is known. Fed Governor Christopher Waller says the Fed should let its balance sheet shrink over the next few years by letting maturing securities roll off, rather than use the proceeds to buy replacements as it did for years after it ended its post-financial crisis bond-buying program. It’s unclear how widely his view is shared at the Fed.
(Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)