Biden meets with Fed Chairman Jerome Powell to discuss the state of the US economy, global economy and inflation
The Federal Reserve is poised to begin lowering its $ 8.9 trillion balance sheet by deploying one of its lesser-known tools as it seeks to control the highest inflation in a generation.
In a plan outlined at the May meeting of the US central bank, policymakers said they would begin settling the balance sheet on June 1 at an initial combined monthly rate of $ 47.5 billion, a move that will further strengthen credit for American households. They will increase the runoff rate to $ 95 billion in September, putting the Fed on track to reduce its balance sheet by about $ 3 trillion over the next three years.
HIGH INFLATION COULD BE “CURSELY SLOW” TO LOWER
The Fed’s balance sheet, which consists primarily of bonds and other assets it has bought, nearly doubled during the pandemic, as the Fed bought mortgage-backed securities and other Treasury bonds to keep debt indebted.
A man wearing a mask passes in front of the US Federal Reserve building in Washington DC, USA on April 29, 2020. (Xinhua / Liu Jie via Getty Images) / Getty Images)
Policy makers say portfolio drainage will work in conjunction with rising interest rates to drive down prices by slowing growth and lowering credit. The Fed voted in favor of raising rates by half a basis point in May and has almost promised that there will be similarly sized rises on the table at upcoming policy meetings in June and July. While it is unclear to what extent the reduction in the balance sheet will be effective in fighting inflation, policymakers have suggested that they are optimistic that it will work to bring down prices.
“While the estimates are very uncertain, using a variety of models and assumptions, the overall balance sheet reduction is estimated at a couple of 25 basis point rate hikes,” the Fed governor said on Monday. Christopher Waller, during a speech.
The question now is whether the Fed can successfully design the soft landing dodge – the sweet spot between reducing demand to cool inflation without sending the economy into a recession. Rising interest rates tend to create higher rates for consumer and business loans, which slows down the economy by forcing entrepreneurs to cut spending.
In this January 29, 2020 archive photo, Federal Reserve Chairman Jerome Powell pauses during a press conference in Washington. (Photo AP / Manuel Balce Ceneta, archive / AP Newsroom)
Fed Chairman Jerome Powell has acknowledged that there could be some “pain associated” with lower inflation and lower demand, but has rejected the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots. of the economy. However, he warned that a soft landing is not guaranteed.
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“It will be a difficult task, and it has become more difficult in recent months because of global events,” Powell said Wednesday during a live Wall Street Journal event, referring to the Ukrainian war and the blockades of Ukraine. COVID in China.
But he added that “there are a number of plausible ways to have a smooth or smooth landing. Our job is not to hurt the odds, it’s to try to get there.”