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With bond-buying ‘taper’ in the bag, Fed turns a wary eye to inflation

By Howard Schneider



With bond-buying 'taper' in the bag, Fed turns a wary eye to inflation
© Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, D.C., U.S., August 22, 2018. REUTERS/Chris Wattie

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve on Wednesday is expected to detail plans to end its pandemic-era bond purchases by mid-2022 as policymakers shift their focus towards what, if anything, to do about a surge in inflation that is lasting longer than anticipated.

U.S. central bankers, in the minutes of their Sept. 21-22 meeting, signaled that a “taper” of the $120 billion in monthly asset purchases would be approved at this week’s gathering of the policy-setting Federal Open Market Committee.

What the minutes described as an “illustrative tapering path” would trim the purchases by $15 billion per month beginning in November or December, a pace and starting point that would end the program by June or July.

(For graphic on Fed balance sheet by era –

Of more note now is how the Fed changes other parts of its policy statement, and particularly its description of inflation as “largely reflecting transitory factors.”

Fed officials still largely hold that view. By some time in 2022 they anticipate that global supply bottlenecks will have eased, pandemic-fueled demand for goods among U.S. consumers will cool after massive spending on cars, motorcycles and appliances, and enough people will be pushing to return to jobs that the pace of wage and benefit increases will also subside.

But in recent weeks Fed officials have acknowledged the risks to that outlook. The jump in inflation this year has already lasted longer than anticipated; headline rates are running at twice the Fed’s 2% target; and rising rents, low business inventories, and large numbers of workers still waiting on the sidelines may mean the high pace of price increases will continue for now.

(For graphic on “Broad-based” or not? “Broad-based” or not? –

The dilemma facing the U.S. central bank is whether inflation eases before policymakers feel compelled to step in with interest rate increases to curb it. Investors are acting as if the Fed’s patience will run out soon.

The Fed cut its overnight benchmark federal funds interest rate to the near-zero level last year in a bid to stem the economic fallout of the pandemic. Trading in federal funds futures currently show investors expecting up to three quarter-percentage-point rate increases in 2022; Fed officials as of September were split over whether there would even be one.

“Will they hold on to the transitory description of inflation? My best guess is they will,” in order to keep their commitment to support the economic recovery until the economy is closer to full employment, said Aneta Markowska, an economist at Jefferies (NYSE:). “If they were being intellectually honest they would probably drop it, but given what is happening in the market the Fed has to tread carefully.”

Push back too hard on the current market expectations, by emphasizing the 5 million U.S. jobs still missing from before the pandemic, and it could “unhinge” the market outlook for inflation, she noted. Lean too hard on inflation risks, and it could push rate hike expectations even higher, begin to restrict credit and borrowing, and slow the recovery.


The Fed is due to release its policy statement at 2 p.m. EDT (1800 GMT). It will not issue new economic forecasts, so beyond the statement it will be up to Fed Chair Jerome Powell in his news conference half an hour later to strike a balance between the two sides of the central bank’s mandated goals of achieving maximum employment and stable prices.

This will be a critical communications moment for Powell whose term as Fed chief ends in February 2022. The White House has yet to announce whether the former investment banker will be reappointed to a second term.

Through much of the pandemic, Powell’s bias – and that of most other Fed policymakers – has been in favor of the job market, in line with the central bank’s new strategic approach to allow more risks with higher inflation in order to push job growth as high as possible.

The Fed currently says it will not raise rates until inflation has not just risen to its 2% target, but is on track to exceed it “for some time,” so that the 2% level is maintained on average following years in which it ran low.

That phrase has not been quantified in terms of how much or how long an overshoot of inflation is intended. While Fed policymakers have generally described achievement of the inflation benchmark as still “a ways off,” a few have noted that the averages are creeping higher already.

(For graphic on Inflation, on average Inflation, on average –

The labor market rebound has also taken on a different course than Fed officials expected. Despite near-record numbers of job openings, labor force participation is improving only slowly – with workers by choice or family necessity taking more time to return to jobs, and using savings elevated by pandemic benefit payments to cover the bills in the meantime.

The employment-to-population ratio is still 2.4 percentage points below where it was at the outset of the pandemic in February 2020, less than half the ground needed to be covered to return to the previous level.

(For graphic on The jobs hole facing Biden and the Fed –

The discussion over the taper of the Fed’s purchases of U.S. Treasuries and mortgage-backed securities will likely end on Wednesday with the central bank declaring that the economy has made “substantial further progress” in healing from the pandemic.

(For graphic on “Substantial further progress” for the Fed? –

The debate will then turn to how much more the job market can improve, how fast it can be done, and whether COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.

“If the Fed projects that inflation will not revert to target within a reasonable amount of time, then the Fed could step up the tightening schedule even if employment is short of the mandate,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote ahead of the policy decision. “The Fed could tell this story after this week’s meeting. In practice, the Fed has made pretty clear it is waiting for more inflation data” to see if the “transitory” narrative holds.


Rough gas storage facility UK to be mothballed



Rough gas storage facility UK

Rough gas storage facility UK, which was mothballed in 2017 due to safety concerns, will resume operations due to the country’s energy crisis. According to The Telegraph, Centrica, which owns the facility, is ready to begin filling it in early September.

The Occupational Safety and Health Administration has already approved the storage facility’s reopening. Now Centrica needs to coordinate state support and get the go-ahead from the North Sea Transition Authority. According to the authors, both of these tasks “do not appear to be problematic” for the company.

At the same time, the newspaper reports that Rough will initially operate at only a quarter of its capacity. A total of about 3.4 billion cubic meters of natural gas could be pumped there. According to the newspaper’s calculations, a partial return to service would increase the current total volume of blue fuel stored in Great Britain to 1.6 billion cubic meters.

“We can bring Rough back into service by increasing its capacity in stages each winter,” Centrica said.

Economists predict that in January 2023, electricity bills in the UK for local households could rise to more than three thousand pounds per year.

Earlier we reported that the U.S. economy was falling for the second quarter in a row.

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Will the decline in the US economy begin to slow? The economy is falling for the second quarter in a row. What does it mean?



decline in the US economy begins to slow

Will the decline in the US economy begin to slow? Compared to the first quarter of 2022, U.S. GDP has fallen by 0.9% year on year, said the country’s Commerce Department. At the same time, the economy was supposed to show growth of 0.3 p. p. This was the second decrease in the year – in the first quarter of 2022; it decreased by 0.3 p p. compared to the previous quarter. The decline in real GDP reflects a decline in private investment in inventories and fixed capital, as well as reduced spending and investment by the federal government.

Decline in the US economy becoming stronger or weaker? 

Despite the decline in real GDP, the Commerce Department reported a 7.8% ($465.1 billion) year-over-year increase in GDP at current prices, as well as an increase in exports and personal consumption expenditures (PCE) related to Americans’ domestic and foreign travel.

Consumer spending, which accounts for two-thirds of U.S. GDP, increased 1% in Q2 after rising 1.8% a quarter earlier. Business fixed investment fell 3.9% and federal government spending declined 1.9%. Exports jumped 18% last quarter, while imports rose only 3.1%.

Economists at Deutsche Bank predicted recessions in the U.S. and Germany on July 15. In their opinion, markets were seriously changed after the data publication on July 13, which showed an acceleration of consumer price growth in the USA. The futures-markets dynamics allow for an almost 100% probability of a recession in the American economy till the end of 2022.

A report from the International Monetary Fund on July 12 stressed that the U.S. will find it “increasingly difficult” to avoid a recession. The Institute worsened its estimates of the economy: the growth forecast for 2022 was decreased from 2.9% to 2.3%; the real GDP growth expectation for 2023 was decreased from 1.7% to 1%.

The Fed is raising the rate at an accelerated pace: at the last meeting – immediately by 0.75 bp to 1.75%, which was the biggest increase since 1994. However, the current prime rate (1.58%) remains very low – far below both the neutral level (2.5%), and the inflation rate (9.1% in annual terms in June). Most analysts expect the Fed to have to raise the rate to at least 3.75-4% at the end of the year.

We should not expect that the very fact of a recession in the U.S. will have a strong negative impact on other developed world economies. The effect will strongly depend on the depth of the crisis. In any case, the severity of the recession will not be comparable to the Great Depression, when for four years there was a rapid drop in GDP.

Earlier we reported on whether Europe is in a recession.

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Is Europe in a recession now: the consequences are listed



is there a recession in Europe

Is Europe in a recession now? The depth of the recession in the eurozone will depend on the pace as well as the extent of the economic decline, which can be tried to regulate by raising key interest rates. The consequences of a recession could be a drop in personal income and a rise in unemployment. 

The euro zone economy is very likely to face a recession, according to 60 percent of experts surveyed by Bloomberg. That number has risen from 45 percent in the last survey and 20 percent since the Russian invasion of Ukraine.

Is there a recession in Europe? 

Is there a recession in Europe? There are different variations on the speed at which the eurozone is going into this dynamic. Most markets will show zero or negative growth in the third quarter. Naturally, this will have an immediate impact on equity and commodity markets. This, in turn, will lead to big changes in the economy.

Different countries, regions and markets will go into recession unevenly. Most likely, the USA will show one more quarter of negative growth rates, which will be a clear indicator of a departure into this phase. The same is likely to be true for Europe.

There is no recession in China, but the growth rate is already declining. This is also a significant factor which will affect the global economy. The depth of the failure will depend on how the authorities of different countries will react to what is happening: whether they will slow down the increase in rates; whether they will manage to achieve a balance. This will have an impact on the price of raw materials, unemployment, etc.

No precise predictions are impossible to make at the moment: we will have to wait for statistics for the third quarter or at least for August.

Earlier we reported on an unexpected threat to the U.S. economy

Continue Reading


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