The Fed hints that asset purchases may slow down this year

According to the Wall Street Journal, the minutes of the Fed’s July 27-28 meeting announced on Wednesday showed that in the remaining three policy meetings this year, the Fed will begin to discuss reducing the size of US Treasury bonds and mortgage securities purchases of US$120 billion per month.

The minutes of the meeting stated: ” Most participants pointed out that if the economy generally develops according to their expectations, they think it may be appropriate to start to reduce the pace of asset purchases this year .”

Several officials are in favor of scaling back asset purchases in the coming months so that the Fed may raise interest rates when the economy strengthens further next year, while others believe that the Fed can wait until early next year because they want to see stronger evidence that the job market has already Recovered from the impact of the epidemic.

Fed officials expect that inflation will temporarily explode as the economy cannot provide enough goods and services this year to keep up with demand. But this outbreak is stronger and more widespread than expected. After excluding the volatile food and energy categories, the Fed’s preferred inflation indicator rose by 3.5% in June, setting a new high in 30 years.

The Fed cut interest rates to zero last year and started buying $80 billion in Treasury bonds and $40 billion in mortgage securities every month to provide additional stimulus. In December last year, officials stated that they would like to see the Fed make “substantial further progress” in achieving its inflation target and labor market conditions consistent with full employment.

Some officials hope to start reducing quantitative easing as soon as possible because they are more worried about rising inflation and hope that the Fed will be ready to raise interest rates next year when needed.

Officials must also consider reducing the speed of asset purchases. In the previous plan that ended in 2014, the Fed moderately scaled down its purchases within 10 months. Several officials recently stated that they are more willing to accelerate the pace of interest rate cuts this year because the economy is making faster progress towards the Fed’s goals.

Other officials at the meeting said that if the economy is strong or inflationary pressures last longer than expected, they hope to reduce the size of asset purchases as soon as possible in order to create greater flexibility for the Fed to raise interest rates next year.

The Fed has stated that officials believe that over time, the inflation rate will average 2%, and once the labor market reaches conditions consistent with full employment, it will raise interest rates from the current level that is close to zero.

The minutes of the meeting stated: ” Many participants believe that the pace of reducing the scale of asset purchases may end net asset purchases before’these conditions’ may be met. “

In addition, senior Federal Reserve officials are very worried about the potential dangers that cryptocurrencies pose to the financial system. Cryptocurrencies have become an agenda at the meeting. This seems to be the first time this topic has been raised in an FOMC meeting.

The minutes stated: “Some participants mentioned various potential risks to financial stability, including risks associated with the expansion of the use of cryptocurrencies.”

Some officials also emphasized the need to regulate stablecoins. The minutes of the meeting showed that officials pointed out that “increasing evidence shows that [stablecoins] are important participants in the commercial paper market and are like unregulated money market funds. Operation—they themselves are even unstable…the vulnerabilities and lack of transparency associated with stablecoins, the importance of closely monitoring them, and the need to develop appropriate regulatory frameworks to address the financial stability risks associated with such products”.


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