Status: 08/27/2021 6:33 p.m.
The US Federal Reserve could begin shutting down its multi-billion dollar bond purchases later this year. Federal Reserve chief Jerome Powell announces this – but does not give a precise schedule.
The world’s most important central bank, the US Federal Reserve, may shut down its large-scale crisis program to purchase securities in 2021. “It might be appropriate to start tapering this year,” said Federal Reserve Chairman Jerome Powell in his much-anticipated speech at the Jackson Hole central bank meeting, again held virtually this year. “Tapering” means reducing the ultra-loose monetary policy measures, ie reducing bond purchases.
Powell did not give a clear timetable, however. The US labor market has made significant progress. But the spread of the delta variant of the coronavirus could slow the recovery. “We will carefully review the incoming data and the risks involved,” said Powell.
A clear signal?
With reference to the corona situation in the USA, the central bank chief is keeping a back door open in order to postpone the planned exit from the ultra-loose monetary policy, noted economist Elmar Völker from the Landesbank Baden-Württemberg (LBBW). Nonetheless, the expert sees a clear signal: “If the recent strong recovery trend on the US labor market does not suddenly end, the US Federal Reserve is likely to curb its bond purchases in the fourth quarter of 2021 for the first time since the beginning of the corona crisis.”
Some observers were disappointed with the Powell speech. “Much ado about nothing,” commented chief economist Otmar Lang from Targo Bank, adding that the Federal Reserve had long been expected to reduce its bond purchases this year.
Gradual exit expected
As early as the next central bank meeting in September Powell could announce a timetable for the “tapering”, some economists believe. Powell should be more specific by September at the latest, said chief economist Lang. Economists Pablo Villanueva, Samuel Coffin and Andrew Dubinsky from the major Swiss bank UBS assume that purchases will be gradually reduced. “We expect that the Fed will initially reduce the pace of purchases by $ 15 billion per session, but will emphasize that further reductions will depend on the economic situation and the pandemic,” say the UBS experts.
In view of the rapid economic upturn after the Corona crisis, a cutback in bond purchases has been discussed within the Federal Reserve for some time. The US Federal Reserve is currently buying securities worth $ 120 billion a month.
Risk of overheating
Recently, several leading central bank representatives spoke out in favor of a rapid tightening of monetary policy. Esther George, head of the Kansas City area Federeral Reserve, spoke on Fox for a “sooner rather than later” reduction in asset purchases. The president of the St. Louis Fed branch, James Bullard, has called for the meltdown of purchases to be completed by the end of the first quarter of 2022.
The rapid upturn had sparked fears that the US economy could overheat. Inflation has skyrocketed in the past few months – to 5.4 percent in July, the highest level since 2008. If the Federal Reserve does not start tapering soon, it could continue to boost the already strong inflation, warns market watcher Konstantin Oldenburger from the trading house CMC Markets. You then run the risk of setting in motion an inflation spiral that is very difficult to stop again.
Investors react cautiously
A look at 2013 and 2014 shows how long it can take to say goodbye to the flood of money. At that time, after months of discussion, the Federal Reserve announced the first reduction in bond purchases in December 2013. In October 2014, the purchases were then completely stopped. “Now one is apparently thinking of driving the current purchasing speed of 120 billion dollars per month to zero in about six months,” believes Commerzbank economist Bernd Weidensteiner.
Investors in the financial markets reacted cautiously to Powell’s speech. Wall Street expanded its price gains slightly, the Dow Jones rose somewhat. Meanwhile, the US dollar fell. The euro rose by half a cent to over $ 1.18. Usually, tightening monetary policy strengthens the dollar.