Federal Reserve Announces Plan to Slow Bond Buying Program

The Federal Reserve is dealing with high inflation at a time when millions of workers remain on the job market’s sidelines.

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Federal Reserve officials took their first major step toward withdrawing monetary policy support as the economy heals from pandemic disruptions and inflation remains sharply elevated, laying out a plan to slow their asset buying program.

“In light of the substantial further progress the economy has made toward the committee’s goals since last December, the committee decided to begin reducing the monthly pace of its net asset purchases,” the Fed said in a statement released Wednesday, referring to its policy-setting group.

The central bank has been buying $120 billion in mortgage-backed securities and Treasury bonds each month to keep cash flowing through the financial system, but will reduce that by $15 billion per month starting this month, it said. Though it will slow those purchases, the Fed’s main policy interest rate — which affects borrowing costs across the economy — remains set at near-zero.

Officials have signaled that they will use their policy rate, which is the more powerful of the Fed’s tools, to help the recovery along until the labor market is more fully healed. But that plan could be upended by rapidly rising prices. The Fed is tasked with achieving full employment and keeping price gains low and stable, and if inflation does not fade next year as policymakers expect, they might decide to lift interest rates to slow down demand and keep inflation in check.

Prices picked up by 4.4 percent in the year through September, well above the Fed’s 2 percent goal. The price gains have been decelerating in recent months after popping this summer, but it is possible that rising rents, climbing labor costs and continued supply chain disruptions could keep them elevated in the months ahead.

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

“Inflation is elevated, largely reflecting factors that are expected to be transitory,” they said. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”

Fed officials are willing to tolerate a temporary bout of inflation as the economy reopens from the pandemic, but if consumers and businesses come to expect persistently higher prices, that could spell trouble. High and erratic inflation that persists would make it hard for businesses to plan and might eat away at wage increases for workers who lack bargaining power.

Jerome H. Powell, the Fed chair, has signaled that he and his colleagues would react if they believed that rapid price gains were going to be sustained.

Slowing bond purchases now will leave them more nimble going forward. Many officials would not want to lift interest rates while they are still making large bond purchases, because doing so would mean that their two tools are working against one another. Finishing the buying program sooner will leave central bankers in a position to lift borrowing costs if a rate increase is deemed necessary.

Understand the Supply Chain Crisis

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Covid’s impact on the supply chain continues. The pandemic has disrupted nearly every aspect of the global supply chain and made all kinds of products harder to find. In turn, scarcity has caused the prices of many things to go higher as inflation remains stubbornly high.

Almost anything manufactured is in short supply. That includes everything from toilet paper to new cars. The disruptions go back to the beginning of the pandemic, when factories in Asia and Europe were forced to shut down and shipping companies cut their schedules.

First, demand for home goods spiked. Money that Americans once spent on experiences were redirected to things for their homes. The surge clogged the system for transporting goods to the factories that needed them — like computer chips — and finished products piled up because of a shortage of shipping containers.

Now, ports are struggling to keep up. In North America and Europe, where containers are arriving, the heavy influx of ships is overwhelming ports. With warehouses full, containers are piling up at ports. The chaos in global shipping is likely to persist as a result of the massive traffic jam.

No one really knows when the crisis will end. Shortages and delays are likely to affect this year’s Christmas and holiday shopping season, but what happens after that is unclear. Jerome Powell, the Federal Reserve chair, said he expects supply chain problems to persist “likely well into next year.”

Fed officials have tried to separate the path to slow bond buying, commonly called “tapering,” from their plans for interest rates. Even so, investors increasingly expect rate increases to start midway through 2022, market pricing suggests.

But there are potential costs to lifting borrowing costs early or aggressively. Many workers have yet to return to the job market after employment plummeted amid pandemic lockdowns. Some employees may have retired, but many people who are now on the labor market’s sidelines may trickle back to the job search as child-care issues are resolved and health concerns wane.

If the Fed slows the economy before they do that, it could be harder for them to move into new jobs, leaving the economy with less potential and families with fewer paychecks.

This is a developing story. Check back for updates.

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