Wednesday April 14, 2021
Distance between steps
Fed: Reduce bond purchases first, then interest rates
The US Federal Reserve supports the economy with bond purchases of 120 billion dollars a month. With the onset of economic recovery, the question of withdrawing aid arises. What is clear, however, is that the interest rate is far from being shaken.
The US Federal Reserve (Fed) wants to consider scaling back its government bond purchases long before a rate hike. Fed Chairman Jerome Powell made this clear at an online event organized by the Economic Club of Washington. “We haven’t voted on this sequence yet, but that is the spirit of our guideline,” he added. In it, the Fed gave the financial markets indications as to how they intend to move away from ultra-loose monetary policy in the future.
It intends to maintain the volume of its monthly security purchases of 120 billion dollars until “substantial further progress” has been made on the way to full employment and price stability. According to Powell, this guideline implies that the phase of shutting down bond purchases will “very likely be reached well before” an interest rate hike.
An increase in the key rate in the current year is very unlikely, according to Powell. Ultimately, however, it depends on when the Fed will achieve its goals. On average, the management level of the central bank expects the key interest rate to remain in the range of zero to 0.25 percent until the end of 2023.
Powell recently said that he saw the US economy at a tipping point in the corona crisis. There is an expectation that growth and employment will pick up in the coming months. The Fed is sticking to its very loose monetary policy line for the time being, as the minutes of the most recent interest rate meeting show. From the point of view of the monetary authorities, support for the economy will continue to be necessary until the recovery has strengthened.