The Fed cannot maintain [its purchases] at the current level. Doing so could lead to higher inflation, said Sen. Pat Toomey (Pa.), a top Republican on POLITICO.Fed policymakers will meet this week to discuss next steps. They are currently pondering how and when they should slow down their bond purchases, which total $120 billion per month. This question has sparked heated discussion within the central bank about the future of the program that saved the financial markets last year from near collapse.Fed officials fear that tapering bond purchases soon could lead to a decline in the economy, especially as there are rising concerns about the coronavirus outbreak. The Fed believes that the first step to a larger event that raises short-term interest rates is to wind down asset purchases. It also wants to make sure that it doesn't slow down the recovery of the job market as millions of Americans are still out of work.It is also unclear how much these asset purchases actually support jobs. The Fed cash machine has greatly benefited publicly traded companies. They have been able to engage in stock buybacks that boost share prices and enrich investors, but little to expand employment.Lou Crandall (chief economist at Wrightson ICAP) said that it is counterproductive at every level. It is not necessary to encourage more borrowing such as this.The Fed's top priority right now is to not surprise investors. Investors are expecting slowing bond purchases, but not for many months. The central bank could move faster than expected, which could cause interest rates to rise and put more pressure on the economy. Eight years ago, a similar Fed move sent the bond market plunging. This forced the Fed to retrace its steps and threatened its credibility.Megan Greene, senior fellow at Harvard Kennedy School, stated that everyone is asking what they are getting for $120 million right now. Tapering could have more dangerous effects so it seems less risky to continue than to stop abruptly.Investors' tolerance for risk is high in the face of trending cryptocurrencies and surging meme stocks, as the Fed noted in its May report on financial stability.Mohamed El-Erian is chief economic advisor at Allianz. Allianz is the parent company to asset management giant PIMCO. He claims that the central bank is making matters worse by continuing to buy.He said that it is easy to argue that the economic benefits are small and outweighed by the risks and costs that threaten the chances of high-quality, sustainable, inclusive growth.The bond-buying process was designed to lower long term interest rates and was heavily used during 2008's financial crisis, when Congress did not do much to help.It is difficult to argue that we live in a world with low aggregate demand. Household demand is growing rapidly and will continue to grow as long as there are no obstacles.Democrats and Republicans both pressed Jerome Powell, Fed Chair, earlier this month to explain why the central bank continues buying $40 billion of mortgage-backed securities every month despite housing prices soaring. This suggests that there is no market need for support.Powell acknowledged that Fed policies contributed to higher home prices, but also cited other factors such as insufficient supply and savings many families were able to accumulate.Jerome Powell, Fed Chair, stressed that purchases by the central bank were made to lower longer-term interest rates and not just mortgages. Susan Walsh-Pool/Getty ImagesHe said that housing prices are rising across the country at an alarming rate. However, this is not due to reckless lending that caused the financial crisis.He said that although housing prices are rising, it is becoming more difficult for buyers to enter the market.Powell stressed that the purchases were made to lower longer-term interest rates and not mortgages.This issue has caused disagreements at the central bank. Rob Kaplan of the Dallas Fed, James Bullard of St. Louis Fed and Eric Rosengren of Boston Fed signaled that they would be open to slowing down purchases of bundled mortgages earlier than U.S. government bonds.Bullard said last month that I am leaning more towards the possibility that we don't need to invest in mortgage-backed securities given the booming housing market here and the threatening housing bubble here.George Pearkes of Bespoke Investment Group, a macro strategist, stated that it is a common misconception that Feds mortgage-backed securities purchases have a targeted impact on mortgages. He said that these types of securities are already backed government so the calculation for a lender about whether to sell a mortgage or not to Fannie Mae or Freddie Mac will not be any different.He said that he absolutely hated this argument. It is absurd, I believe.Roberto Perli, founder of Cornerstone Macro research firm and former Fed economist, said that the Fed's purchases can also cause confusion.Perli stated that the Fed's asset purchase or "quantitative ease" benefit is completely front-loaded. Markets react to central banks' initial announcement of massive buys in a short time period and adjust rates accordingly. The Fed will only follow through on these purchases once investors have accounted for them.Perli stated that even if there wasn't any QE today, the Fed might be considering whether it was necessary to do so. But QE was needed a while back, like a whole year ago. And since nobody thought QE would end in a month, two months, or six months, the market set expectations about how much QE it would be.He said that these expectations were the only thing that mattered. That was the reason QE was so successful at the time, as people expected it to be large.Senator Banking Chair Sherrod (D-Ohio), for his part, urged the Fed ensure that all Americans benefit the recovery. This contrasts with the economy during the years following the 2008 financial crisis.He told POLITICO that Wall Street decimated our economy and cost families their jobs, their homes, and their savings. Then, everyone else was able to get on their feet, while the Feds came back. The Fed's responsibility is to ensure that this does not happen again. This includes ensuring financial stability, and focusing on workers and their families in decisions about monetary policy.
