The U.S. central bank is poised to start at least talking about when it will start to adjust its monetary policy as the U.S. economy continues to climb from the depths of the pandemic.
The Federal Reserve has set the target range for the key Fed funds rate, the interest rate that governs costs of borrowing across the economy, at a range of 0% to 0.25%, in a bid to provide low-cost money so that the economy can recover from the COVID-19 pandemic. The Fed is also purchasing some $120 billion in bonds in a bid to keep interest rates low.
As the economy recovers, a reduction or tapering of those bond purchases is expected as the Fed's first action to tighten monetary policy as it seeks to not let the economy grow too fast to spur inflation that would cause damages across the economy and curtail economic activity.
For months, Fed Chairman Jerome Powell has said it is not yet time for the Fed to start “talking about talking about” tapering the bond buys. That comment he made months ago has become a source of questions nearly every time he has met with reporters, and he has maintained that it is not yet time for that to happen.
But that time is getting closer. The April 27-28 meeting of the Federal Open Market Committee (FOMC), the meeting of Fed officials where they set monetary policy, indicated that to be the case. The recap of the meeting issued last week noted that FOMC members thought that if the U.S. economy continues to make strong progress, “it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” That is “Fed speak” for talking about tapering.
This mention is important because coming out of the financial crisis, the Fed also embarked on purchasing securities/bonds in a bid to keep interest rates low. A comment from then-Fed Chairman Ben Bernanke in congressional testimony that the Fed was talking about reducing those bond buys spooked investors and roiled stock and financial markets, a response that was called the “taper tantrum.”
Bernanke responded by emphasizing over and over in following appearances that the Fed was not ready to take such a step. In fact, the Fed did not take that action for several months after Bernanke's comment. Powell, it seems, learned from the Bernanke experience. That is why he has taken grate pains to emphasize that the Fed does not think things have reached a point where the bond buys need to be reduced.
Powell also pledged that when the Fed does take such a step, it will not be a surprise to markets. He wants to avoid another “taper tantrum” from unfolding in the markets. So, based on the minutes from the April meeting and comments from Fed officials in recent days, we're getting closer to the discussion taking place on tapering those bond purchases.
This sets the stage for the U.S. central bank to tighten its easy monetary policy. That will mean borrowing costs will start to increase. That will start a new chapter for the U.S. economy as it will start to increase costs for consumers to do many things, like buying a home, buying a car, and using credit cards and more.
So we will see. The process of raising interest rates has begun as the economy recovers. And, it means that agriculture will be seeing a rising cost component in the form of higher interest rates. While any increases are not expected to be large, this is still situation which needs to be watched closely, Washington Insider believes