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© Reuters. FILEPHOTO: The Federal Reserve Board building in Washington, U.S.A. is seen on March 19, 2019, REUTERS/Leah Millis/File Photograph

By Ann Saphir

(Reuters] – The Federal Reserve plans to decrease its support for America’s economy in the near future. It will begin cutting its monthly asset purchases of $15 billion per month starting next month. This process should continue until mid-2022.

This is at most the Fed’s roadmap, as suggested by its post-meeting statements and minutes, along with remarks from Fed Chair Jerome Powell. The Fed will likely make it clear at its Wednesday policy meeting. Officials may also keep open the possibility of speeding-up or slowing tapers to fit economic needs.

Overall, however, Patrick Harker of the Philadelphia Fed predicts a “boring exit” from $120 billion monthly bond purchases.

Even though the Fed will reduce bond-buying programs at twice the rate this time, it is still a significant improvement on 2014.

The contrast is stark to the March 2020 moment, when U.S. authorities first shut down certain parts of America to combat the spread COVID-19. The Fed responded by cutting interest rates to zero and launching a series of emergency lending programs. It also began hoovering trillions of Treasuries as well as mortgage-backed bonds.

Bond-buying has been credited with stabilizing the financial system, bolstering demand, and facilitating a quicker recovery after the worst downturn for decades.

Recently, some Fed policymakers have begun to question its effectiveness. They even raise the alarm about potential dangers given an economy with rising inflation and excess demand relative a shortage of supply. Minutes from the Fed’s most recent meeting reveal that they all agreed it needed to be reduced quickly.

This is a review of the Fed’s Pandemic Bond-Buying Program. It includes what policymakers thought, what they did and what lies ahead.

(GRAPHIC: In with a boom, out with a … – https://graphics.reuters.com/USA-FED/byvrjrggbve/chart.png)

A CRACK, THEN THE FLOODGATES

Fed Chair Powell made a short and uncharacteristic statement on February 28, 2020 as stocks plunged due to reports about the spread of the coronavirus. Powell stated that the Fed was “closely watching developments and their implications on the economic outlook” but “will use our instruments and act as necessary to support the economy.”

The policymakers reduced interest rates by half of a point three days later. The rate was cut to almost zero by policymakers on March 15. They also promised to continue buying “at minimum” $500 billion worth of Treasuries in the coming months and 200 billion mortgage-backed security. They changed to an unrestricted pledge eight days later to buy “in the amount necessary” in order to help smooth out markets and assist with monetary policy transmission.

Between April’s end and two months of recession, weekly Fed accountings showed that the Fed had added $1.4 trillion in Treasuries to their balance sheet and $234 billion in mortgage-backed securities. In comparison to $4.4 trillion prior to the pandemic, $6.7 trillion was added by central banks’ balance sheets.

THE STEADY STREAM

Powell pointed out at his regular news conference that by June 2020 the Fed’s bond buying had settled into a slower rhythm. Each month it bought $80 billion of Treasuries and $40 trillion in housing-backed bonds. According to its statement, the Fed said that they would buy bonds at a “minimum pace” for the next months in order to support smooth markets and to transmit monetary policies. It maintained that language in September and stated that it would continue to buy bonds “at least at the current pace” to maintain smooth markets and transmit monetary policy.

CONFIRMATION OF THE TEST FOR A TAPER

With its balance sheet of $7.4 trillion at December 2020, the Fed began the clock to end its bond purchases. It promised to continue the $120 million per month pace until significant progress is made towards the Committee’s price stability and maximum employment goals.

These statements were issued in January March, April, April and June this year.

NEARING the BAR for TAPER

According to July’s statement, “the economy made progress toward those goals.” In August Powell stated that the inflation bar was met and that maximum employment had been achieved. He said it would be appropriate for this year to begin reducing bond purchasing. The Fed stated that “if the progress is broadly consistent as anticipated, then the Committee considers that moderation of asset purchase may be justified soon.” Powell went further during the subsequent news conference. He stated that the unemployment test has been “all but passed” and that we could “easily move forward at our next meeting.” Policymakers support reducing the pace that will “put us finishing our taper in the middle of next fiscal year.”

TAPER TIME

“I think it is time to taper.” This is how Powell stated it Oct. 22. It leaves little doubt about the outcome of this week’s meeting. According to minutes from September’s meeting, policymakers believed that reducing Treasury securities purchases of $10 billion per month and decreasing mortgage-backed securities purchases of $5 billion per month would be “straightforward” and appropriate. This pace would mean that purchases of Treasury securities will cease completely in June if taper is initiated in November. At the current tapering pace, the Fed’s balance book will reach just above $9 trillion at its end. This is twice the size of it pre-pandemic.

(GRAPHIC: Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)

WHAT’S THE NEXT

Although policymakers disagree on when that would happen, the Fed should take the next step towards normalizing monetary policy and raise rates.

The fate of the balance sheets is unknown. Christopher Waller (Federal Reserve Governor) says the Fed should allow its balance sheet to shrink over the next several years, letting matured securities roll-off and not using the proceeds to purchase replacements like it did in years following the end of its bond-buying programme after the financial crisis. His views are not widely shared by the Fed.

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