The Federal Reserve (FED) has approved plans to limit bond buying that will begin in November and end completely in June 2022. Since June 2020 the FED has purchased nearly $120 billion a month in corporate and government debt.
Since the pandemic began in early March, the FED cut the interest rates it lends to commercial banks to near zero to provide liquidity to the economy, as well as begin a massive bond-buying program as part of the monetary stimulus for the pandemic emergency.
Since March 2020, the value of debt securities purchased by the FED has doubled to $8 trillion by October. The agency will reduce bond purchases by $15 billion in November and another $15 billion in December.
Although the FED has decided to reduce bond purchases due to inflation, the central bank assures that the increase in prices is “largely reflecting factors that are expected to be transitory.”
The institution insists that “supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors”.
FED Chairman Jerome Powell insists that factors that are driving inflation such as the container crisis, or the microchip shortage, will be transitory. “We continue to believe that our dynamic economy will adjust to the supply and demand imbalances,” he said at a press conference following the Federal Open Market Committee (FOMC) meeting.
Despite the reassurance Powell is trying to convey to the market, the central banker ended by admitting “it is very difficult to predict the persistence of supply constraints or their effects on inflation.”
Although the FED insists on conveying the narrative that inflation will be transitory, many in the market assume that higher prices will continue to rise for some time. According to financial analyst, Wolf Ritchier: “the FED its narrative on inflation.”
For Ritchier “The FED is still trying to blame shortages that suddenly came out of nowhere, but they didn’t come out of nowhere, the FED engaged in a huge money printing to inflate asset prices so the people that would make those gains would spend some of them and further stimulate demand, and the government had a massive amount of deficit spending in order to boost demand.”
There are some indicators that show that the inflation Americans are currently experiencing is not a product of scarcity, such as the rising cost of leases or the price of used cars, which do not depend on any supply chain to set their prices.
The cost of housing is responsible for up to one-third of the changes in the consumer price index, which is made up of the price of existing leases and the price of new leases.
“I’m near Atlanta and I feel lucky to have the privilege of paying 1500 for a two-bedroom apartment that is falling apart, has bug problems and serious maintenance problems,” complains Mike Garcia, a renter who has been affected by the increase in rents.
The cost of new leases has risen by as much as 11% on average, with the exception of 11 cities (including San Francisco). In the nation’s top 100 metropolitan areas, the price of leases has risen significantly.
The price of used cars has also gone through the roof, rising as much as 30%. “There’s not a lot of negotiating that goes on right now on price,” explains Wes Lutz, owner of a car dealership in Jackson, Michigan.
The lack of negotiation on a price reflects that Americans are preparing for higher inflation, and would rather frontload their purchases now than leave them for the future, panicking that prices will rise even more in a few months.
Although the FED still maintains that interest rates will remain near zero until 2023, already some banks such as Goldman Sachs are warning that the central bank will likely have to reverse its expansionary monetary policy by mid-June if it does not want inflation to spiral out of control.
Even if the FED decides to raise interest rates in 2022, empirically it takes up to 18 months for changes in monetary policy to have an effect on inflation, so even if the Central Bank decides to take action now, it will not be until 2023 that the U.S. will begin to see a slowdown in price growth.