Thinking about buying program: Fed wants to sell corporate bonds again

Thinking about buying program
Fed wants to sell corporate bonds again

The US economy has recently accelerated its growth again. The central bank wants to throw some corporate bonds back on the market that it bought during the crisis. The big purchase program for government bonds is still going on. But here, too, there are signs of a change of course.

The US Federal Reserve (Fed) plans to start selling corporate bonds it bought to support the markets last year during the corona pandemic. The central bank announced that the sale of bonds and listed funds from the so-called SMCCF (Secondary Market Corporate Credit Facility) should take place “slowly and according to plan.” The New York Fed, which manages the facility, said it announced more details on Thursday’s sales.

The aim of this credit vehicle was to ensure stability and liquidity in the financial markets during the Corona crisis. Companies should get fresh money as easily as possible. The SMCCF was barely used and closed at the end of December 2020. The Fed wants to have sold the entire portfolio by the end of the year. The facility has loans totaling nearly $ 14 billion.

On the other hand, the Fed also buys US government bonds to the tune of $ 120 billion a month as part of its monetary policy efforts to keep financing costs and interest rates low on the financial market. As the economy continues to recover, however, Fed leaders are starting to think aloud about scaling back this bond-buying program as well. The central bank plans to keep the key interest rates low for a long time, said the president of the Fed branch of Philadelphia, Patrick Harker, at a virtual event. But it might be time to at least delve into thinking about how to melt away the monthly bond purchases.

Price pressure is increasing

According to the economic report published today in the Fed’s “Beige Book”, the US economy grew moderately from the beginning of April to the end of May, but faster than in the previous reporting period. Several districts have highlighted the positive effects of higher vaccination rates and the easing of containment measures on the economy. Disruptions in the supply chains were stated as opposing effects.

Since the previous economic report, the price pressure has increased further, it is said. The input costs have risen across the board, above all strong price increases for raw materials for construction and production have been reported. Further cost increases are expected in the next few months.

With regard to the labor market, two thirds of the central bank districts reported a moderate increase in the workforce. With the relaxation of the corona restrictions, this mainly affected services in the areas of restaurants, hotels and retail. But producers also hired in several districts.

The US Federal Reserve prepares the next meeting with the Beige Book. No resolutions are expected for the meeting on June 15th and 16th. In the past, the Fed declared a “series of strong job data” to be a prerequisite for a change in monetary policy.