The president of the Federal Reserve, Jerome Powell, threatens this Friday to leave more than one cold with his expected speech from the symposium in Jackson Hole (Wyoming). The virtual meeting, which began Thursday, comes amid the resurgence of Delta variant-related infections and downside risks weighing on growth.
A context that divides senior central bank officials on whether the current economic diagnosis really qualifies as “substantial additional progress.”
Route to be determined
In more general terms, the schism that is brewing within the Federal Open Markets Committee (FOMC) continues to generate great uncertainty not so much because of the beginning of tapering , as the process of reducing purchases of debt, but by the rhythm and composition of it. To this day, the Fed gobbles up $ 80 billion in Treasuries and $ 40 billion in mortgage-backed assets (MBS) a month.
Federal Reserve officials do not want to formally link the timing of the end of asset purchases to the first rise in interest rates. The median of the most recent FOMC projections suggest that the first of the two rate hikes will occur sometime in 2023 , but as early as June, seven officials anticipated at least one rate hike in 2022. These officials would presumably seek to put end of the purchasing program in mid-2022.
Ending asset purchases for the third quarter of next year would be easier if the Fed limited itself to announcing a pre-established schedule, allowing a fixed reduction each month. The cut in Treasury purchases by $ 10 billion and MBS purchases by $ 5 billion a month would allow, assuming the Fed began tapering this December, to complete the reduction in July next year .
The Fed hesitates between a predetermined path or an adjustment that changes meeting to meeting
But if the Fed only adjusts purchases at each meeting, that is, every six weeks, things get complicated, especially if the central bank waits until the beginning of the following month to implement each reduction in asset purchases. A reduction of $ 10 billion and $ 5 billion per meeting means that the tapering would not be completed until December 2022 , which would be too late for many officials. It would have to be a reduction of $ 15 billion and $ 7.5 billion per meeting to complete the process in August.
Assuming the Fed chooses to adjust meeting by meeting, it would end up buying just over $ 400 billion in Treasury securities and $ 200 billion in MBS from the time we meet until next August. This means that the accumulated holdings of Treasury bonds from the Federal Reserve would reach approximately 25% of the supply of Treasury debt held by the public.