With more and more people convinced that the recession will be over this year, this week officially marked the beginning of the discussion: When does the Fed go into tightening mode to prevent inflation? CNBC even did a long segment with inflation hawk James Grant.
It’s going to be a long, slow process until the Fed actually tightens rates again (people who think it’s happening this year are probably nuts) but this morning the Journal reports that bond buys, so-called quantitative easing, is likely to be phased out or capped. It’s not very specific. The Fed may still also try other tools, but the technique hasn’t been working all that well, and concern is growing about effects.
WSJ: The Fed’s task is complicated by the fact that it is using tools it has never used before. It has already cut the interest rate that banks charge each other on overnight loans — once its primary economic-stimulus tool — to zero, and it has vowed to keep it there for a while. It has also turned to bond buying and targeted lending.
Another challenge on the June agenda is how to communicate Fed thinking about the complex set of “crosscurrents,” as one official describes it. Fed officials believe markets may have gotten ahead of the economy, reacting to government data that the pace of job losses is slowing by anticipating an increase in the Fed’s key short-term interest rates by year end. Some Fed officials see that as an overreaction.