Watch for the Fed to tiptoe toward tapering this week
The Federal Reserve is expected to have a lengthy discussion this week about slowing down the monthly bond purchases that are so important for financial markets.
Mohamed El-Erian, chief economist advisor at Allianz, said that the most markets will hear next week is “some conditioning to expect tapering at the end of the year.” Monetary policy hawks on the Fed policy making committee downplay this requirement and want the central bank to start the process sooner rather than later.
As a result, at the meeting this coming week, economists think the Fed will do the planning and review a range of tapering scenarios such as whether to slow down MBS purchases at a faster pace than Treasurys, but no decisions are expected. Economists generally agree the Fed won’t raise its benchmark interest rate until after it has stopped monthly purchases entirely.
That seemed like an appropriate strategy when inflation was low but inflation has roared back this year and is now well above the 2% target. The consumer price index jumped to a 5.4% pace over the past 12 months ending in June.
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