Federal Reserve Preparing for Taper

Provided by Robert Warther, Warther Private Wealth




On Wednesday the 18th, the Federal Reserve released the meeting minutes from their end of July meeting. These minutes have been highly anticipated as concerns over inflation have been growing in recent months. The minutes revealed that the FED is indeed talking about reducing the bond buyback program, which is currently spending $120 billion a month. The FED also revealed that they are considering when to increase the interest rate, which is currently sitting near zero.


In the meeting FED officials also discussed how increased inflation, current unemployment rates and the Delta variant of Covid 19 might affect the US’s economic recovery, and therefore their policy decisions. There is a risk that the increasing amount of new Covid cases may delay people from returning to school and work, which could dampen the economy. Inflation has increased too over the past year, as the economy has been working to recover from Covid. In June, inflation had reached 3%, which was over the FED’s target of 2%, while the economy is still down over 5 million jobs from where it was prior to the pandemic. This leaves the FED in a delicate balancing act between reducing the bond buyback program and increasing interest rates.


While the consensus being that the FED will start to taper the buyback soon, FED officials did have varying opinions on when exactly to start the taper. The minutes noted that “several” members felt that the current policies are still helping with recovery of the job market and from Covid. These members stated that the current bond buyback program is helping with that process. “A few” of the members felt that the current FED policy had done all it could, arguing that the recovery process is driven by private businesses and personal decisions. “Several” other FED members raised concern over comparing the current job market to the job market prior to Covid, citing that the economy has changed a lot since then.


Although the meeting did not give an exact date for when the tapering will start, it did reveal that most FED officials expect it to start by the end of this year. However, for the FED to start the taper, they will be closely watching job reports for the next few months, to determine if unemployment is going down and how the Delta variant of Covid is affecting the economy.


Back in December, the FED announced that it would not start the taper process until the job market saw substantial progress. During this time, the economy was down about 10 million jobs when compared to employment rates prior to the pandemic. Since then, the US has added 4.3 million jobs, with 1.9 million of these created in June and July. Some expect this trend to continue, but it may be slowed again by the Delta variant of Covid.




Robert Warther may be reached (239) 276-7939, or bob@wartherprivatewealth.com.





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Sources:

- https://www.reuters.com/world/us/fed-minutes-likely-detail-bond-buying-taper-talks-inflation-worries-2021-08-18/

- https://www.cnbc.com/2021/08/18/fed-minutes-july.html


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