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Does the US economy need another $480 billion in stimulus?

by GFeed News Desk
August 22, 2021
0
Does the US economy need another $480 billion in stimulus?

Part of a package of emergency measures to support the US economy during the pandemic, the Federal Reserve is buying $120 billion in bonds per month. But, as activity resumes, will that level of assistance be required?

This is one of the key questions facing central bankers as they gather in Jackson Hole, Wyoming this week for their annual meeting.

What’s going on: Due to the pandemic, the event, which usually attracts central bankers from around the world, will be scaled back. Neither Christine Lagarde, President of the European Central Bank, nor Andrew Bailey, Governor of the Bank of England, will be present.

This focuses the spotlight on the Federal Reserve, which hinted last week that it might start tapering its bond purchases by the end of the year.

Between September and December, the Fed would scoop up about $480 billion in assets at its current rate. However, there has been some debate as to whether this is truly necessary.

“It’s harder to argue now [that] the Fed needs to keep going with these emergency support measures,” Andrew Hunter, senior US economist at Capital Economics, told me.

Retail sales are significantly higher than they were before the pandemic, and the US economy added 943,000 jobs in July.

The enhanced child tax credit, which was part of President Joe Biden’s $1.9 trillion stimulus package, will also result in monthly bank deposits for tens of millions of US households through the end of the year.

Most Fed watchers agree that news on bond purchases will be unlikely at Jackson Hole, though Chair Jerome Powell’s speech on Friday will be closely watched. Instead, they believe the Fed will announce in September that it will begin tapering bond purchases, with the change taking effect before 2022. (However, the Delta variant is still a mystery.)

Only two large-scale asset-buying programs have been launched by the Federal Reserve in its history: one after the 2008 financial crisis and another in response to the pandemic. This makes predicting how financial markets and the real economy will react difficult.

There are some fears that the financial markets will go into a tailspin. The “taper tantrum” of 2013, when the Fed announced it would eventually reduce asset purchases, sparked a sharp bond market selloff, lingers.

“There’s always the possibility of short-run turbulence,” said Randall Kroszner, a former Federal Reserve governor who served from 2006 to 2009.

But, according to Michael Skordeles, senior US macro strategist at Truist Advisory Services, this recovery looks very different from the one that followed the financial crisis.

“Going across many industries, things look very strong,” he said. “That wasn’t the case in 2013.”

Even then, according to Kroszner, the short-term market shock had little impact on the economy. Even if interest rates rise slightly as the Fed alters its policy, they will likely remain near historic lows.

The Fed hopes that by starting to back away this year, it will be able to do so gradually and without causing too much turbulence.

“Starting earlier allows them to do it even more gradually,” Skordeles said.

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