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FED to Reduce Debt Buying on Expectations of Lasting Inflation

FED, Inflación

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At its last meeting, the 18-member Federal Open Market Committee (FOMC) of the Federal Reserve ( FED) indicated that the U.S. central bank would soon begin to limit the debt buying it has been engaging in since the pandemic began.

For more than a year, the FED has been buying the equivalent of $120 billion a month in federal debt bonds and mortgage securities. The FED could begin limiting debt purchases as early as November, several officials have commented in the past that the central bank may have to end asset purchases sooner than expected.

The central bank buys $80 billion in U.S. Treasuries each month, as well as $40 billion in corporate debt and mortgage-backed securities.

Persistent inflation, together with the weak recovery of the labor market, has led FED officials to reconsider their asset purchase policy. (EFE)

In December, FED officials announced that the central bank would continue asset purchases until “substantial progress has been made going forward” in the economic recovery. In just over a year the FED’s asset portfolio has grown from $4.2 trillion to more than $8.4 trillion.

Recent inflation indicators, coupled with the timid jobs recovery during the month of August, is leading FED officials to reconsider the effectiveness of current monetary policy in recovering jobs lost during the pandemic.

In July the Fed had concluded that interest rates would be lifted by the fall of 2023, but under the risk that the inflation currently experienced by the U.S. may not be transitory, interest rates could begin to rise as early as 2022.

The FED’s goal remains to achieve full employment in the U.S. economy at a cost of 2 % annual inflation over the long term. At present, cumulative inflation for 2021 exceeds 4.4 %.

Markets reacted positively to the announcement, showing that they fear inflation more than running out of FED stimulus. (EFE)

Stock indexes reacted positively after the FED meeting as did the yield of 10-year treasury bonds, indicating that investors fear inflation more than the possibility of the FED decreasing its liquidity injections to the market.

The opening of business, the vaccination rate, as well as more than $2.8 trillion in government spending has led to the economy’s recovery progressing rapidly, however, economic growth has come at the cost of higher inflation, especially in the cost of energy and food; despite the recovery in demand, businesses still struggle to find staff.

The spread of the delta variant of the coronavirus has clouded growth prospects somewhat, and reinfections by the more contagious strain of the virus could slow the country’s economic recovery.

FED projections indicate that most officials believe interest rates will have to rise to at least 1 % by 2023. By reducing debt purchases now, FED officials will have greater flexibility to raise interest rates in the future.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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