Federal Reserve Update

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A senior Fed official warned that the Fed’s emergency bond purchase plan is not suitable for an economy that is blocked by tight supply, and urged a prompt end to stimulus measures to avoid heavy debt and inflationary pressures.

Boston Fed President Eric Rosengren told the Financial Times that he will support the central bank’s announcement next month that it will begin to reduce or “shrink” the $120 billion monthly asset purchases this fall. , And stop buying as planned. By mid-2022.

Rosengren said that in an environment of severe shortages of basic materials and workers, purchasing Treasury bonds and institutional mortgage-backed securities is no longer the correct remedy. In an interview on Monday, he added that the current situation is different from the aftermath of the 2008 global financial crisis, when the Fed faced insufficient demand and reduced borrowing costs to solve this problem.

“Our big problem now is not that people are unwilling to buy goods and services. The problem is that it is difficult to find labor and materials to actually produce goods and services,” he said. “So in this environment, we have a greater impact on temporary price increases, and a smaller impact on attempts to restore full employment and a more sustainable inflation rate.”

Rosengren, who will be a voting member of the Federal Open Market Committee to formulate policy next year, said that the price increase and debt burden driven in part by asset purchases could eventually jeopardize the recovery.

“I do worry that, over time, the possible reversal of excessive leverage and price increases may undermine our ability to achieve full employment.”

As evidence of shortage of supply rather than insufficient demand, Rosengren pointed to the booming real estate industry.

“If the price of materials rises sharply and it is difficult to find construction workers to the site, then the lower interest rate will increase [housing] Demand, but they may not be able to do a lot in terms of increasing employment,” he said.

He said the same is true for the automotive industry, citing an annual growth rate of more than 40%. Second hand car Part of the reason for the price is the global shortage of semiconductor chips.

He said: “Due to these supply constraints caused by the pandemic, the cost-benefit analysis surrounding the asset purchase program has slightly changed.” “I’m not sure if we get the same benefits as during the financial crisis.”

Asset prices are another worrying issue, and many investors are increasingly taking more risks. For example, investors holding high-yield bonds require additional yields or “spreads” that are higher than U.S. Treasury bonds, hovering near historical lows.

The chairman of the Boston Federal Reserve said: “One side effect of pushing interest rates quite low is that, by design, you are encouraging people to take more leverage.” “The goal is not to cause asset prices to soar.”

Rosengren-his views and more”Hawks“Members of the Federal Reserve, including Robert Kaplan of Dallas and James Brad of the St. Louis Fed-weighed in on the central bank’s turning point.

Officials have merge Approximately in recent weeks idea The Fed may begin to reduce the scale of asset purchases this year because it has made “substantial further progress” in achieving an average inflation rate of 2% and the goal of maximizing employment.

Many people at the Federal Reserve, including Rosengren, believe that the Fed has achieved the first of these goals, and there will be one or two strong employment reports in the coming months to consolidate the second.

Rosengren said that further increases in these two areas, the inflation rate moderated to more than 2% for a period of time, and the unemployment rate further dropped to about 4% or lower, which may lay the foundation for the Fed to raise interest rates as early as 2022. .