Fed's bond-buying timeline: roaring entry, boring exit?
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[November 02, 2021] By
Ann Saphir
(Reuters) - It is hardly a secret by now
that the Federal Reserve is going to reduce its support for the U.S.
economy soon: starting this month it will likely begin to pare its
monthly asset purchases by $15 billion each month until ending them by
mid-2022.
That, at least, is the roadmap suggested by the Fed's post-meeting
statements, minutes of its meetings, and remarks from Fed Chair Jerome
Powell. It is expected to be spelled out when this week's policy meeting
wraps up Wednesday, although officials may keep options open for
speeding or slowing the taper to suit economic needs.
But overall, the Fed has telegraphed what Philadelphia Fed President
Patrick Harker says will be a "boring" exit from what is now $120
billion in monthly bond buys.
That is despite the fact that the reductions this time will proceed at
about twice the pace as the last time the Fed ended a bond-buying
program, in 2014.
It is also a stark contrast to March of 2020, when U.S. authorities were
first shutting down parts of the economy to prevent the spread of
COVID-19. In response the Fed abruptly cut interest rates to zero,
rolled out a raft of emergency lending programs, and began hoovering up
trillions in Treasuries and mortgage-backed bonds.
The bond-buying is credited with helping stabilize the financial system
and, later, to bolster demand and foster a faster recovery from the
sharpest downturn in decades.
More recently some Fed policymakers have questioned its effectiveness
and even raised the alarm over its potential harms amid an economy
marked by rising inflation and too much demand relative to
pandemic-constrained supply. They all agree it should be pared back
soon, minutes from the Fed's last meeting show.
Here is a look back at the arc of the Fed's pandemic bond-buying program
- what policymakers said, what the central bank did, and what's likely
to lie ahead.
(GRAPHIC: In with a boom, out with a ... - https://graphics.reuters.com/USA-FED/byvrjrggbve/chart.png)
A CRACK, AND THEN THE FLOODGATES
Fed Chair Powell issued a terse and unusual statement Feb. 28, 2020, as
stock markets plunged amid reports of the rapid spread of the novel
coronavirus. The Fed, he said, is "closely monitoring developments and
their implications for the economic outlook" and "will use our tools and
act as appropriate to support the economy."
Three days later policymakers cut interest rates by half a percentage
point. On March 15, they slashed the rate to near-zero, where it has
stayed since, and promised to buy "at least" $500 billion of Treasuries
and $200 billion of mortgage-backed securities in coming months. Eight
days later they shifted to an open-ended pledge to continue buying "in
the amounts needed" to smooth markets and aid in monetary policy
transmission.
By the end of April and the two-month recession, the Fed's weekly
accountings show they had added $1.4 trillion of Treasuries, and $234
billion of mortgage-backed securities. The central bank's balance sheet
stood at $6.7 trillion, up from $4.4 trillion before the pandemic.
THE STEADY STREAM
By June 2020, the Fed's bond-buying had settled into a slower rhythm:
$80 billion in Treasuries and $40 billion in housing-backed bonds each
month, Powell noted at his regular news conference. In its statement the
Fed promised "over coming months" to continue to buy bonds "at least at
the current pace" to sustain smooth markets and help transmit monetary
policy. In September it kept that language and added that the purchases
would "help foster accommodative financial conditions" and keep credit
flowing to households and businesses.
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Federal Reserve Board building is pictured in Washington, U.S.,
March 19, 2019. REUTERS/Leah Millis/File Photo
SETTING THE TEST FOR TAPER
In December 2020, with its balance sheet at $7.4 trillion, the Fed started the
clock on the end to its bond buying, promising to keep up the $120 billion a
month pace "until substantial further progress has been made toward the
Committee's maximum employment and price stability goals."
This language remained unchanged for the statements issued in January, March,
April and June of this year.
NEARING THE BAR FOR TAPER
July's statement acknowledged that "the economy has made progress toward these
goals," and in August Powell said the bar had been met for inflation, and "clear
progress" had been made toward maximum employment; it could, he said, be
appropriate to start reducing bond buying this year. In its September
post-meeting statement the Fed went further: "if progress continues broadly as
expected, the Committee judges that a moderation in the pace of asset purchases
may soon be warranted." Powell went still further in the news conference that
followed, saying the employment test is "all but met" and "we could easily move
ahead at the next meeting," with policymakers supporting a pace of reduction
that "will put us having completed our taper around the middle of next year."
TAPER TIME
"I do think it's time to taper." That's how Powell put it on Oct. 22, leaving
little doubt for the outcome of this week's meeting. Minutes from the September
meeting showed policymakers thought reducing Treasury securities purchases by
$10 billion each month and mortgage-backed securities by $5 billion each month
would be "straightforward and appropriate." At that pace, if the taper begins in
November, purchases would be phased out completely by June. On Oct. 27 the Fed's
balance sheet stood at $8.6 trillion; at the expected tapering pace, it will be
just over $9 trillion when the program ends, twice its pre-pandemic size.
(GRAPHIC: Fed balance sheet by era - https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)
WHAT'S NEXT?
At some point the Fed is expected to take the next step back to monetary policy
normalcy by raising rates, although policymakers are currently divided on
whether that will happen in 2022 or 2023.
As for the fate of the balance sheet, even less is known. Fed Governor
Christopher Waller says the Fed should let its balance sheet shrink over the
next few years by letting maturing securities roll off, rather than use the
proceeds to buy replacements as it did for years after it ended its
post-financial crisis bond-buying program. It's unclear how widely his view is
shared at the Fed.
(Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)
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