Minutes of the July 27-28 FOMC meeting released yesterday showed that many Fed officials expressed the opinion that they could begin to slow the pace of their bond purchases this year, as part of making progress on inflation standards and reducing unemployment. As the prominent details in the meeting minutes;
· Various respondents commented that economic and financial conditions will likely require a decrease in the rate of bond purchases in the coming months.
· Others, however, noted that a slowdown in the pace of asset purchases is more likely to become available early next year.
· Most respondents expressed the opinion that “it may be appropriate to start slowing the pace of asset purchases this year.
· Regarding the composition of their bond purchases, most respondents noted that “they saw the pace of their net purchases of Treasury securities and the benefits of proportionally reducing their MBS purchases.”
While the Fed minutes show that the separation of the members on tapering continues; most members expressed the opinion that bond purchases could be reduced this year within the framework of economic progress standards. Here, it is possible to talk about a wide spread of views on the speed and structure of asset purchases. After reducing benchmark interest rates to zero in March 2020, the Fed launched a $700 billion asset purchase program ($200 billion in mortgage-based securities + $500 billion in Treasury bonds) as part of the supportive policy. Since 2020, the Fed has purchased $80 billion of Treasury securities and $40 billion of mortgage-backed securities (MBS) each month. The Fed’s policy commitment is “until substantial progress is made towards maximum employment and price stability goals” in terms of recycling these purchases.
If we give a reference from the current and different views of Fed members;
· Minneapolis Fed Chairman Neel Kashkari wants to see “several” strong business reports.
· Boston Fed President Eric Rosengren said that if September employment figures are good, they can be prepared for tapering at the next meeting.
· St. Louis Fed President James Bullard said the asset purchase program could be narrowed until the first quarter of 2022.
The minutes show that the authorities still see room for improvement of the labor market. There was a strong job gain of high monthly average up to July this year. Unemployment remained at 5.4% last month, but broad-based and demographic, income, or line of business indicators are still lax. Hispanic and black unemployment rates remain markedly higher than headline unemployment. There are similar different distributions in income groups as well. Although price increases are rapidly crossing the threshold, it is obvious that the maximum employment point is still far away and an equal distribution of employment is not achieved. As for inflation; The increase was rapid as both supply and demand imbalances pushed prices up, causing the Central Bank to fail to ignore the fact that short-term inflation risks would remain high. Moreover, asset purchases lowered long-term interest rates and led to an increase in housing prices.
Fed balance sheet composition (GB+MBS) (2008 – 2021)… Source: Bloomberg, Federal Reserve
Therefore, there is a short-term inflation outlook with the potential and risk of increasing financial imbalances against inflation that will decline in the longer term. The Fed will not raise interest rates simultaneously with tapering, which it will start in practice. Therefore, we can predict that the balance sheet will still be large and the Fed will continue to provide support to the markets. In other words, there will actually be a gradual contraction of the balance sheet. The current Central Bank balance sheet is quite large compared to 2013, you can see the balance sheet composition consisting of only MBS and GB in the chart above. The rate of reduction of these purchases will reduce the balance sheet to 2014-2015 levels in the first place. The next meeting will take place on September 21-22. It may be possible for the Fed to switch to the oral phase of the tapering issue at its September meeting, and to start a reduction in the December meeting or in the 1Q22 period.
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Hibya Haber Ajansı
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