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Experts expect Fed’s bond tapering policy to roll out as early as this year

PUBLISHED ON 2021-08-27 00:07:00 EST Yashasvini


Minutes released from the Federal Reserve Board and the Federal Open Market Committee’s July 27-28 meeting show that the Fed officials expect the bond-buying tapering to start this year itself.

The points discussed show that several officials are in favor of the U.S. central bank trimming its bond-buying program later this year to reduce purchases of Treasury securities and mortgage-backed securities (MBS) "proportionally" so they end at the same time.

The majority of the officials want to initiate bond tapering before interest rate hikes begin whereas several others are pushing for a more gradual approach.

"Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally to end both sets of purchases at the same time," according to the readout.

Bond tapering refers to the reduction of the rate at which the central bank accumulates new assets on its balance sheet under a policy of quantitative easing. To avert a rerun of the 2008 financial crisis, the Fed began buying a massive amount of bonds and MBS each month, when the markets experienced free fall at the beginning of the pandemic.

Despite an improvement in the labor market and economy, the Fed continues to buy almost $120 billion worth of bonds and MBS every month filling the economy with cheap credit and stabilizing the market.

The vaccination drive and the reopening of the economy have led to a surge in demand. This, along with the supply chain shortage has resulted in inflation. Cheap credit has led to an increase in housing prices.

The Federal Reserve will have to start reducing its asset purchases until it stops buying them altogether.

Fed Chair Jerome Powell is due to give a virtual speech at the Jackson Hole economic conference, on Friday, which usually takes place in Wyo. Analysts expect Powell to relay some of the Fed's thinking.

Experts say that the Federal Reserve needs to provide clear guidance on its rollback policy while avoiding excessive divisions or splits that may erode the market's confidence in the central bank.

Picture Credits - Bloomberg/Getty Images

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