The Federal Reserve Board has emerged from its July 27-28 meeting with several announcements of interest to ISRI members.
Fed officials voted to hold interest rates near zero and to continue government-backed bond purchases. Keeping interest rates low is good news for recyclers, says Bret Biggers, ISRI’s senior economist. “The cost of borrowing money is still very low, so it’s a great time for recyclers to update their plants if they haven’t already, get new equipment, and make long-term contracts,” he explains. “Of course, there’s always a risk when you buy major capital, because things could change three months from now—there’s no guarantee.”
The Fed reaffirming its policy to achieve maximum employment and averaging 2% inflation over the long run may not sound like news. But it’s reassuring to hear, especially as reports of creeping inflation are widespread. In June, the Consumer Price Index (CPI) increased 0.9% on a seasonally adjusted basis after rising 0.6% in May. This was the largest one-month change since June 2008, when the index rose 1.0%. “Inflation is currently running high compared to [the Fed’s] desired 2%,” Biggers says. “The issue is how long does the Fed let it go on before it starts implementing the tools at its disposal?”
Fed Chairman Jerome Powell acknowledged that inflation is above the 2% average. He also noted he believes inflation is transitory and largely due to the problems facing U.S. supply chains. The Fed is closely monitoring inflation and stands by ready to act when needed, Powell stressed.
The Fed is open when it comes to short-term offerings of cash in exchange for ultra-safe assets like Treasury bonds. The Federal Open Market Committee (FOMC) has announced a new domestic standing repurchase agreement facility (SRF) and a separate repo facility for foreign and international monetary authorities (FIMA). An SRF allows eligible counterparties to borrow from the Fed against eligible collateral at a fixed rate.
The SRF will allow the Fed to conduct overnight repo operations against Treasury securities, agency debt securities, and agency mortgage-backed securities with a maximum operation size of $500 billion. When the Fed enters into an overnight repo transaction, it buys a security from an eligible counterparty and also agrees to sell the security back the next day. The FIMA facility lets the Fed enter into overnight repos with foreign official institutions against their holdings of Treasury securities at the Federal Reserve Bank of New York. This facility provides an alternative temporary source of U.S. dollars for approved FIMA account holders of Treasury securities other than sales of the securities in the open market.
“These two facilities will provide additional back stop measures, so the Fed is getting ready for inflation if needed,” Biggers explains. The facilities will help support implementing monetary policy and smooth market functioning. “The Fed is going to make sure the business world has as many knowns in front of it for planning purposes, rather than shocks or surprises,” Biggers adds. “They’re trying to eliminate those sharp increases or decreases of market conditions based on inflation.”
It seems like the Fed is trying keep conditions relatively stable, Biggers adds, which should help recycling facilities prepare for anticipated increases from curbside, industrial, and commercial streams.
Image courtesy of ISRI.