London (CNN Business)The Federal Reserve is buying $120 billion in bonds per month, part of a package of emergency measures to prop up the US economy during the pandemic. But as activity returns to normal, is that level of support necessary?
That's among the key questions facing central bankers when they gather for an annual meeting in Jackson Hole, Wyoming this week.
What's happening: The event, which usually includes central bankers from around the world, will be a pared-back affair due to the pandemic. Neither European Central Bank President Christine Lagarde nor Bank of England Governor Andrew Bailey will be in attendance.
hat puts attention squarely on the Federal Reserve, which telegraphed last week that it could begin to taper its bond purchases by the end of the year.
At its current pace, the Fed would scoop up about $480 billion in assets between September and December. But debate has been growing about whether that's really needed.
"It's harder to argue now [that] the Fed needs to keep going with these emergency support measures," Andrew Hunter, senior US economist at Capital Economics, told me.
Retail sales are significantly above pre-pandemic levels, and the US economy added 943,000 jobs in July. Tens of millions of US households will also receive monthly bank deposits through the end of the year — the result of the enhanced child tax credit that was part of President Joe Biden's $1.9 trillion stimulus package.
On deck: Most Fed watchers agree that news on bond purchases at Jackson Hole is unlikely, though Chair Jerome Powell's speech on Friday will be monitored closely. Instead, they think the Fed will formally announce its plans to start tapering bond purchases in September, with the shift kicking in before 2022. (Though the Delta variant remains a major unknown.)
The Federal Reserve has only launched two large-scale, asset-buying programs in its history — one after the 2008 financial crisis, and one in response to the pandemic. That makes it difficult to game out how financial markets and the real economy will respond.
There are some concerns that financial markets could panic. The memory still looms of the 2013 "taper tantrum," when the Fed's announcement that it would eventually slow asset purchases sparked a sharp bond market selloff.
"There's always a chance for short-run turbulence," said Randall Kroszner, who served as a Federal Reserve governor between 2006 and 2009.
But this recovery looks very different from the one that followed the financial crisis, according to Michael Skordeles, senior US macro strategist at Truist Advisory Services.
"Going across many industries, things look very strong," he said. "That wasn't the case in 2013."
Even then, the short-term shock to markets had little effect on the actual economy, said Kroszner. Even if interest rates move up slightly as the Fed changes course, they're likely to remain very close to historic lows.
The hope is that by beginning to step back this year, the Fed will be able to gently back away without causing too much tumult.
"Starting earlier allows them to do it even more gradually," Skordeles said.