Is the Fed About to Roll Back Support?

In an article in The New York Times, conversations held at the Federal Reserve’s July meeting were examined as they indicated some clues that emergency economic support may soon be on the retreat. While officials voted to keep low interest rates and continue backing bond purchases, they did spend much of the meeting discussing how to decelerate the bond-buying program and when that should happen.

The most important takeaway from the meeting is that officials have assured investors that when emergency support ends, it will be with plenty of planning and warning. It will not be a sudden or surprise move.

The debate over the bond-buying program is a key sign that change may be on the horizon because a slow-down of this policy would indicate that the Fed is pursuing a return to normalcy in a time where the economy is in a strong rebound from the pandemic slow-down.

The Fed indicated that two factors would signal that it’s time to slow the bond-buying process: stable inflation and maximum employment.

These two areas are important signs of how the economy is faring and will determine the pace of the bond-buying program.

Inflation: As the economy gets stronger, the dual influences of strong consumer spending and stimulus checks have led to inflation. For example, the Consumer Price Index jumped up by 5.4% in June, the fastest pace measured since 2008. The Fed measured inflation at a more subtle 3.9%, but both rates are over the goal of an average 2% inflation rate.

While it’s unclear how persistent the rise in inflation could be, Fed officials say that the current inflation is transitory. That means that even if your household goods were 5% more expensive this summer, that doesn’t mean they will get more expensive by 5% next summer and the summer after.

Prices will still increase and there won’t be a reversal in the process, but the pace could slow.

Labor: Strengthening the labor market is also a key provision in Fed officials’ plans for slowing bond-buying activities. Experts suggest that workers may be reluctant to reenter the workforce because they are still concerned about the virus, have caregiving responsibilities or are receiving unemployment benefits.

There are broader reasons Fed officials are exercising caution. If they move too quickly to return to pre-pandemic activities, the economic impact could be a whipsaw that threatens markets and overturns any progress the economy has made. The Fed must strike a balance between easing emergency measures without causing too great a disruption in the economy.

“I can’t say I disagree with what is said in this article. The Federal Reserve is walking a tightrope between setting expectations and attempting to control market perceptions. This article explores the options facing the Fed and some of the possible outcomes.”

Tom Sudyka, Portfolio Manager, Lawson Kroeker Investment Management

You may be wondering how the Fed’s response will impact your portfolio. You can trust that your investment advisors at Lawson Kroeker are carefully following these updates and considering how various events could affect our clients. Contact us to make an appointment if you have any questions.  

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