No Excuse: Fed Demands Stop Pumping Money to Fast Growing Markets



“The Fed has no reason to support [its purchases] at current levels, and it seriously risks fueling inflation, ”said POLITICO Senator Pat Toomey (Pennsylvania), Republican chief on the Banking Committee.

Fed executives, who will gather this week to discuss their next steps, are now trying to decide how and when to start slowing down bond purchases, which amount to a staggering $ 120 billion a month. The issue sparked heated debate within the central bank itself over the future of the program that saved financial markets from near-collapse last year.

Some Fed officials believe that cutting bond purchases too quickly could weaken the economy after trillions of dollars in separately-approved bailout bailout run dry, especially amid growing concerns over the latest coronavirus outbreak. The phasing out of asset purchases is the first step towards a bigger event – raising short-term interest rates – and the Fed wants to ensure that its actions do not slow down the labor market recovery as millions of Americans are out of work.

But it is also unclear how much these asset purchases actually help sustain jobs. Publicly traded companies, which benefited greatly from the Fed’s cash register, were embroiled in a wave of share buybacks that boosted share prices and enriched investors, but did little to directly increase employment.

“It’s counterproductive at all levels,” said Lou Crandall, chief economist at Wrightson ICAP. “Encouraging such borrowing is simply not necessary.”

A big priority for the Fed right now is not to surprise investors who expect a slowdown in bond purchases, but not for several months. If the central bank moves more quickly, it could spur interest rates and slow the economy down much more than it anticipated. A similar move by the Fed eight years ago caused the bond market to crash, forcing the central bank to back down and jeopardizing its credibility.

“Everyone’s wondering what we’re getting for $ 120 billion right now,” said Megan Green, senior fellow at Harvard Kennedy School. “But cutting back can have even more nefarious consequences, so the risk of continuing treatment seems lower than the risk of giving it up too quickly.”

At the same time, investor risk tolerance is unusually high amid rising memorial reserves and fancy cryptocurrencies, as the Fed itself noted in its May financial stability report.

Mohamed El-Erian, chief economic adviser to Allianz, the parent company of asset management giant PIMCO, says the central bank is making things worse as it continues to buy.

“You can argue quite easily that the economic benefits are limited and far exceeded because of the costs and risks that are beginning to undermine the prospects for high, sustainable and inclusive growth,” he said.

The bond buying process, designed to lower long-term interest rates, was widely used during the 2008 financial crisis, when Congress could do little to help.

“Now it is very difficult to argue that we live in a world of insufficient aggregate demand,” he said. “Home demand is growing and will continue to grow as long as nothing gets in the way.”

Earlier this month, Fed Chairman Jerome Powell was pressured by both Democrats and Republicans alike as to why the central bank continues to buy up $ 40 billion in mortgage-backed securities every month, even as home prices rise, suggesting the market is not needs support.

Powell acknowledged that the Fed’s policies helped drive house prices up, but he mentioned other factors, such as the lack of homes and savings that many families have managed to accumulate.

“Home prices are rising at a high rate across the country, and I believe the good news is that this is not driven by the reckless and irresponsible lending that led to the housing bubble that led to the latest financial crisis,” he said. … said.

“However, home prices are rising, and of course this makes it difficult for entry-level buyers to enter the housing market,” he said.

Powell also stressed that these purchases were aimed at lowering all long-term interest rates, not just mortgages.

This issue has sparked controversy at the central bank. Dallas Fed President Rob Kaplan, St. Louis Fed President James Bullard and Boston Fed President Eric Rosengren are signaling that they will be willing to slow down buying mortgage packages before buying US government debt.

“I’m a little leaning towards the idea that maybe we don’t need to use mortgage-backed securities with a booming housing market and even a threatening housing bubble here, according to some people,” Bullard told CNBC last month.

But George Pirks, macro strategist at the Bespoke Investment Group, said it was a misconception that the purchase of mortgage-backed securities by the Fed is purposefully affecting mortgages. Since these types of securities are already government-backed, he said, the lender’s calculation of whether to sell mortgages to housing giants Fannie Mae and Freddie Mac will not be much different.

“I absolutely hate this argument,” he said. “I think this is nonsense.”

The effects of the Fed’s purchases are also misunderstood, says Roberto Perli, founding partner at research firm Cornerstone Macro and a former Fed economist.

Purley said the gains from the Fed’s asset purchases – or “quantitative easing” as it is called – are entirely tentative: markets are reacting to the central bank’s initial announcement that it will conduct bulk purchases indefinitely. and rates are adjusted accordingly. The rest of the process is simply the Fed completing purchases that have already been factored in by investors.

“If today there was no quantitative easing, and the Fed was thinking,“ Okay, do we need to do this? “The answer is likely to be no,” said Purley. “But QE was needed some time ago, about a year ago, and no one ever thought that QE would end in a month, two or six months, so the market was looking forward to how much QE there would be.”

“In fact, all of these expectations mattered,” he added. “And at the time, QE was so effective because people expected QE to be great.”

For his part, Senate Banking Chairman Sherrod Brown (Ohio Democrat) called on the Fed to ensure that all Americans benefit from the recovery, contrasting with the economy in the years following the 2008 financial crisis.

“Wall Street destroyed our economy, robbing families of jobs, homes and savings – and then came back with a roar while everyone else was limping,” he told POLITICO. “The Fed’s job is to ensure that this doesn’t happen again — both by monitoring risks to financial stability and by focusing the attention of workers and their families, rather than Wall Street, in their monetary policy decisions.”


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