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Federal Reserve officials are gathering in Washington this week with monetary policy still set to emergency mode, even as the economy rebounds and inflation accelerates.
Economists expect the central bank’s postmeeting statement at 2 p.m. Wednesday to leave policy unchanged, but investors will keenly watch a subsequent news conference with the Fed chair, Jerome H. Powell, for any hints at when — and how — officials might begin to pull back their economic support.
That’s because Fed policymakers are debating their plans for future “tapering,” the widely used term for slowing down monthly purchases of government-backed debt. The bond purchases are meant to keep money chugging through the economy by encouraging lending and spending, and slowing them would be the first step in moving policy toward a more normal setting.
Big and often conflicting considerations loom over the taper debate. Inflation has picked up more sharply than many Fed officials expected. Those price pressures are expected to fade, but the risk that they will linger is a source of discomfort, ramping up the urgency to create some sort of exit plan. At the same time, the job market is far from healed, and the surging Delta coronavirus variant means that the pandemic remains a real risk. Policy missteps could prove costly.
Here are a few key things to know about the bond-buying, and key details that Wall Street will be watching:
The Fed is buying $120 billion in government backed bonds each month — $80 billion in Treasury debt and $40 billion in mortgage-backed securities.
Economists mostly expect the central bank to announce plans to slow those purchases this year, perhaps as soon as August, before actually dialing them back late this year or early next. That slowdown is what Wall Street refers to as a “taper.”
There’s a hot debate among policymakers about how that taper should play out. Some officials think the Fed should slow mortgage debt buying first because the housing market is booming. Others have said mortgage security buying has little special effect on the housing market. They have hinted or said they would favor tapering both types of purchases at the same speed.
The Fed is moving cautiously, and for a reason: Back in 2013, markets convulsed when investors realized that a similar bond-buying program after the financial crisis would slow soon. Mr. Powell and crew do not want to stage a rerun.
Bond-buying is just one of the Fed’s policy tools, and is used to lower longer-term interest rates and to get money chugging around the economy. The Fed also sets a policy interest rate, the federal funds rate, to keep borrowing costs low. It has been near zero since March 2020.
Central bankers have been clear that tapering off bond purchases is the first step toward moving policy away from an emergency setting. Increases in the funds rate remain off in the distant future.
The Federal Reserve is debating when and how to slow its huge bond purchases, the first step in moving away from its emergency stance as the economy rebounds from the pandemic. As it does, the hole that the coronavirus blew through the labor market looms large.
The reasons to withdraw support soon are obvious. Growth is coming in strong, bolstered by vast government spending. Inflation has heated up, and while that is expected to be a temporary situation, the increase in prices is surprisingly strong.
But the jobs situation is another story. About 6.8 million jobs are missing from employer payrolls compared with February 2020.
The central bank has every reason to expect the economy to continue healing once it slows (or even stops) the bond buying. Asset prices may fall a little bit, and longer-term interest rates might rise slightly, but the Fed’s policy rate is still set at rock bottom, which should keep borrowing costs relatively low. Government spending continues to trickle out into the economy. Many consumers are flush with savings, and eagerly spending them.
The key for Jerome H. Powell, the Fed chair, and his colleagues is to avoid tanking the economy by surprising investors and causing markets to gyrate, credit to dry up and growth to pull back more abruptly than planned.
The state of the job market is a particularly good reason to proceed carefully. If the Fed accidentally sends an overly aggressive signal to markets, causing financial conditions to become too restrictive when millions are still in need of new positions, it could make for a long road back to full employment.
The risk looms especially large as a coronavirus variant causes cases to surge in many countries, including the United States. While it is still unclear how much of a hurdle the Delta variant poses to growth, it has underlined that the pandemic is a persistent threat.
For now, the Fed is being careful to broadcast every incremental step as it debates when and how to begin tiptoeing away from its policy support, something it wants to do only after the economy has made “substantial” further progress. The idea is that a constant drip of communication will prevent any market-rocking surprises.
And the central bank has set out an even more ambitious, and more patient, goal when it comes to interest rates. Barring some big surprise in which financial risks or inflation bubble up dangerously, officials want to see the job market return to maximum employment before lifting borrowing costs.
“They’d like to wait,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. She explained that officials were weighing the need to keep longer-run inflation under wraps against the many jobs still missing — and hoping that price pressures proved short-lived.
“They’re banking on the T-word,” Ms. Bostjancic said. “Transient.”
Yet when that “full employment” goal will be met is a major unknown. Many workers have retired since the start of the pandemic, and it is not clear whether they will return to work even if opportunities are plentiful.
But the participation rate for prime-age workers — the share of people between the ages of 25 and 54 who are working or actively looking for jobs — has fallen precipitously since last year, and Fed officials are hoping to see that figure recover. Lingering child care issues and pandemic nervousness may be keeping would-be workers at home.
The Fed is trying to wait and see what the job market can do.
“It would be a mistake to act prematurely,” Mr. Powell told lawmakers recently. “At a certain point the risks may flip, but right now the risks to me are clear.”
The airline industry took the unusual step on Tuesday of asking federal regulators to help increase jet fuel supplies at the Reno-Tahoe International Airport, one of several smaller airports in the West that have been hit by shortages.
In a petition, Airlines for America, a trade association, and World Fuel Services, a company that supplies airlines with fuel, warned the Federal Energy Regulatory Commission that the shortage of jet fuel had become so dire that it could force airlines to cancel passenger and cargo flights. The trade group predicted low fuel inventories through Labor Day.
The airline industry wants the commission to mandate that pipeline operators deliver more jet fuel to the Reno airport by temporarily prioritizing those supplies over other fuels like gasoline and diesel.
The shortages at smaller airports, mainly in the West, have been caused by several factors, among them the post-pandemic travel boom, a shortage of truck drivers and heightened demand for jet fuel by firefighting crews that are trying to put out several large wildfires with aircraft.
At the same time, airlines have increased flights to destinations like Reno above 2019 levels because of the popularity of domestic vacation spots like Lake Tahoe, the northern shore of which is less than an hour from the Reno airport by car.
Tom Kloza, global head of energy analysis at the Oil Price Information Service, said another factor in the shortages is problems at refineries in Western states that process crude oil into jet fuel, gasoline and diesel. Many are not operating at full capacity because of unscheduled maintenance and because recent heat waves have made it difficult for those industrial plants to operate normally.
“It’s unusual but it’s really limited to the Western geography,” Mr. Kloza said.
Airlines operating out of several airports in Nevada, on the Pacific Coast and in and around the Rocky Mountains have been forced to delay and cancel flights in recent days. The Oil Price Information Service has reported that the situation is expected to worsen, particularly if the wildfires persist into August. The information service reported that other airports that have experienced “hand-to-mouth supplies of jet fuel” include those serving Sacramento; Boise, Idaho; and Spokane, Wash.
“Transporters stress that every regional airport that is not supplied via pipeline is struggling to get enough fuel to handle robust summer demand,” Mr. Kloza said.
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