Fed may signal when the bond buyback will slow. But it won’t go cold turkey

Every month since

June, the Federal Reserve has been buying about

$80 billion of US government bonds and about

$40 billion of bonds backed by home mortgages. Initially the goal was keeping credit flowing to consumers and companies. The bond buying has continued with the aim of keeping market interest rates low. It is one of the agency’s more visible efforts to underpin the pandemic economy as it recovers. The action has helped support stock market confidence.

COVID-19 launched a stable of new, untried strategies by the central bank to stave off an economic depression taking hold in the spring as safer-at-home directives and business restrictions were implemented to slow the spread of the virus. The buying of Treasury and mortgage-backed bonds can be considered old hat after the Fed did the same for eight months in 2009. It was referred to as quantitative easing back then and its goal was to keep borrowing costs low in hopes of encouraging spending.

The virus-induced bond buying by the Fed came after it cut its short-term target interest rate to zero. In September, it anchored expectations that it will keep its rate at zero until full employment returns, inflation pop up to two percent and is expected to be a little over two percent for a while.

When the central bankers meet on Tuesday and Wednesday in the week ahead, they may give the investment markets clues about how long the bank will keep buying bonds. It is not expected to go cold turkey, but how an inevitable cutback in the purchases will happen — and by how much —are important details in how investors react to less economic stimulus.

When the former Federal Reserve Chairman Ben Bernanke told Congress in the spring of 2013 it would reduce buying bonds if the economy continued improving, his comments induced a “taper tantrum” – sending market interest rates up and stock prices tumbling five percent in a week.

Jerome Powell was a member of the group then. Today, he is the chairman. He would like to head off any market tantrum before it begins.