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Powell suggested that the Fed will stick to the 2013–14 playbook when it begins to reduce its asset purchases


Federal Reserve Chairman Jerome Powell on Wednesday suggested the Fed would stick to the same books it developed in 2013 and 2014 when it decided to reverse its asset-buying program, meaning that asset-buying cuts will come “before” any rate hike.

The Fed is currently in the territory of its emergency policy that began when the coronavirus pandemic hit the economy last spring. The central bank cut its policy rate to zero in March last year and pumped billions of dollars into the financial markets to avert the financial crisis.

Since last summer, the Fed has bought $ 40 billion in the Treasury and $ 80 billion in mortgage-secured securities each month to boost the economy and keep financial market conditions steady. .

During a censorship discussion sponsored by the Economic Club of Washington, Powell was asked for the sequence of any future withdrawals from the Fed’s current monetary policy regime. .

The Fed chairman said the central bank is likely to reduce asset purchases “before we consider raising interest rates.”

“We haven’t voted in that order yet, but that’s what the guideline means that it will work that way,” said Powell.

The comments fill in some gray areas for economists looking to gauge the Fed’s plan for the inevitable exit. Economists predict the US economy will bounce back this year, with gross domestic product likely to reach 10% annually in the coming quarters.

It is the same policy that the central bank followed in 2013 and 2014. The Fed began reducing asset purchases in December 2013 and not raising interest rates for two years.

When asked when the Fed will ease slightly, Powell will not issue any calendar date for the policy change – saying it will depend on the state of the economy.

The Fed has said it will not scale down purchases until it sees “further significant progress” on maximum job creation and steady average inflation at 2%. It said it won’t raise interest rates until the economy returns to full employment, inflation has already hit 2 percent and has been on track to moderate above 2 percent for some time.

After the 2008 financial crisis, “we bought assets and then gradually slowed down the pace of buying bonds and mortgage securities,” said Powell.

“When purchases go to zero, the size of the balance sheet stays the same and when the bonds mature, you reinvest them,” he said.

Powell notes that any decision to narrow the balance sheet is “one more step” that happened “at the end of the day in the last cycle” – when the Fed allowed bonds to begin to fall, Powell said. note. As of today, he said, “we have yet to decide whether to do it or not.”

Also, the Fed didn’t sell its balance sheet bonds into the market in the previous cycle, and Powell said he doesn’t think the Fed will do that either.

The Fed’s balance sheet is currently more than $ 7 trillion.

Economists generally believe that the Fed will begin to increase asset purchases early next year. Any rate hikes probably won’t come for another year. But a few people said that the Fed may have to tighten sooner.

Currently, the bond market
TMUBMUSD10Y,
1,636%

seems pleased with the story that the first rate hike will not come before the end of 2022 or 2023. At the Fed, 11 out of 18 senior policymakers don’t see the first rate hike for coming after 2024.

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