An official with the Federal Reserve hinted on Wednesday that the Fed may want to start lessening the number of bonds it has been buying under President Joe Biden in light of recent economic recovery amid a waning pandemic.
“I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said during a Women in Housing and Finance event this week, according to a report from the Washington Examiner. “When that is, that is something we need to start discussing.”
Harker said the Fed is planning to keep the federal funds rate low for a while, but that the $120 billion per month the Fed has been buying in U.S. Treasury bonds and mortgage-backed securities may no longer be necessary.
In fact, to continue buying the bonds at that rate could actually overheat the economy, which could lead to inflation and cause growth to slow over the longer term.
“Taper the bond purchases”
Harker said that if the Fed does change its policy of buying the bond and securities, it will do so gradually to avoid a negative impact on the economy.
“This is not something we are going to do suddenly, though,” he said, according to prepared remarks cited by the Examiner. “We need to follow the playbook we had after the Great Recession; that is, start to taper the bond purchases slowly. We will remove accommodation carefully and methodically as the economy continues to strengthen.”
As the Examiner noted, the Fed’s “beige book” report for May showed that prices were beginning to rise in some areas, which could be an effect of all the money flowing into the economy thanks to recent stimulus bills and other monetary policies designed to keep things going during coronavirus-related closures.
Nearly all Americans and many small businesses got infusions of cash to help them keep paying bills while many businesses were shut down and people were not working due to COVID-19, and all of this cash may be overkill for the economy as it tries to recover now that most states have lifted restrictions.
Theft by inflation
“On balance, overall price pressures increased further since the last report,” the beige book read, according to the Examiner. “Selling prices increased moderately, while input costs rose more briskly. Input costs have continued to increase across the board, with many contacts noting sharp increases in construction and manufacturing raw materials prices.”
That means we haven’t seen the worst of inflation yet, because “input costs” include the raw materials to make many products, and those products are going to have to cost more in order for businesses to make money.
According to the Examiner, former Treasury Secretary Larry Summers said recently that inflation from an overheated economy was a bigger threat than unemployment and a slowing economy. After all, inflation means that your money will not buy as much, and that any money you have saved will be worth less.
As U.S. Rep. Tom McClintock (R-CA) explained in a recent op-ed for the Examiner, if you have $100,000 saved for retirement and inflation is 4.2% annually, as it has been so far this year, it’s like the government taking $4,200 of your money — and they don’t even need to pass a tax increase to do it.