holdings would end by the middle of next year. host: joining us now is nick timiraos of the wall street journal. what exactly was the action taken by the fed? guest: it helps to go back to march of 2020, when the pandemic hit the u.s. and caused a global financial panic.

the fed did a lot of things, but they did two main things. they cut interest rates to zero, which is where they are today. as they did during the financial crisis, once interest rates were down to zero and they could no longer stimulate the economy by lowering interest rates they began to purchase treasury securities and mortgage-backed securities. they have been doing those in large amounts since last year. what jay powell, the fed chair, announced yesterday was the fed was going to slow down the pace of those purchases. it is their first step toward getting away from the emergency settings that they adopted when the pandemic hit. the first thing they would do would be to run those purchases down. instead of by $120 billion a month, they are going to buy -- buying $120 billion a month,

they are going to reduce every month. that would end these asset purchases by the middle of next year. it is at that point that the fed would take a look at whether they thing interest rates need to go up. host: how is it that purchasing a mortgage security is a stimulus program? guest: that is a great question. monetary policy, which is what the fed controls, is about setting the price of money in the lending market, the markets that banks lend to each other overnight. they can manipulate the quantities of reserves that banks have to influence interest rates. when they raise interest rates or lower interest rates, they are focusing on short-term borrowing costs. once interest rates have been cut to zero, if the fed still wants to provide stimulus, they

can affect borrowing costs for longer dated securities. that is what they have done in the current situation and after the 2008 financial crisis. sometimes people refer to this as quantitative easing, but what it really is is a fancy way of saying the fed is trying to drive down longer-term borrowing costs. if you thing about the cost of borrowing for an auto loan or mortgage, those things are not always influenced directly by short-term interest rates. they are set more by a 30 year mortgage instrument. if they can drive down the price , the yield of a mortgage-backed security or the 10-year treasury yield, a popular benchmark in the interest rate market, that can be a way for them to provide further stimulus in the economy. you have seen that over the past year. mortgage rates have been at record lows.

the housing market is booming. that is one way the fed tries to provide more stimulus when interest rates have been cut to zero. host: you talked about buying mortgage-backed securities, mr. timiraos. does that mean the fed owns my mortgage, your mortgage, etc.? guest: you could say it that way. most of the mortgages they buy are owned or guaranteed by other government related entities, fannie mae and freddie mac or government agencies. those agencies have already guaranteed to make investors hold if you do not pay your mortgage. it is not quite the fed directly owns your mortgage, but they are taking these assets out of private investors's hands to push down borrowing costs.

host: nick timiraos is the chief economic correspondent for the wall street journal. we are talking about his story this morning and the wall street journal, fed sets outlined to taper stemless program. he has covered economics for a long time. he has covered the fed for a long time. numbers are divided by political affiliation. go ahead and dial in on those numbers and we will get to those calls in a minute. the fact that the wall street journal led with the story this morning, was it a surprise, what mr. powell had to say? was it expected? guest: the decision to wind down these purchases was far from a surprise. it was something the fed and jay powell have telegraphed for months. one of the reasons they have done this is the last time they wound down, sometimes referred

to as tapering bond purchases, the last time they did this in 2013 it created a big reverberation for financial markets. long-term treasury yields went up. it caused outflows of cash from emerging markets. that is referred to as the taper tantrum. investors got confused about why the fed was doing what it was doing. this time around got powell was careful and trying to telegraph why the fed was going to move when it moved and to make sure there were no surprises. the bigger focus of yesterday's meeting and press conference was how powell would characterize the outlook for inflation over the next year. it has raised questions about how soon and quickly the fed might raise interest rates. because the taper was no

surprise it was so well telegraphed, the focus now is on the fed has said they think high inflation we have seen this year is going to be temporary and go away as the pandemic was excited to reseed recede -- recede. if inflation stays above, economists have anticipated, what is the fed going to do about that? the fed has a 2% inflation target. during the past decade, they had difficulty getting inflation up to 2%. last year, they changed their framework and said we want to get to a place where inflation is a little above 2%. when they did that, no one anticipated we would see inflation rise at the rate it is now.

the question now is how soon is this going to come down? will the fed have to raise interest rates and slow demand, slow the economy, slow the pace of home construction and try to get inflation to rise at a lower level? host: hear from yesterday's the -- here from yesterday as the chairman of the federal reserve. [video clip] >> the drivers of higher inflation have been predominate connected to the dislocations caused by the pandemic. specifically the effects on supply and demand from the shutdown, reopening, and ongoing effects of the virus itself. we understand the difficulties that high inflation poses for individuals and families, particularly those with limited means to absorb higher prices for essentials such as food and transportation.

our tools cannot ease supply constraints. we continue to believe our dynamic economy will adjust to the supply and demand balances. as it does, inflation will decline to levels closer to our longer run goal. it is difficult to predict the persistence of supply constraints or effects on inflation. global supply chains are complex. they will return to normal function, but the timing of that is uncertain. host: from jay powell, our tools cannot ease supply constraints. guest: that is the challenge for any central bank. what do you do when inflation is above your target but it is not necessarily due to things that are within your control, such as a supply shock? you can think of an oil price spike is a good example. central banking 101 would say if

you do not -- would say you do not supply -- respond to a supply shock if it is something that will reverse on its own. monetary policy takes time to influence the economy. it takes time to speed up or slow down growth. if you think it is something that is going to go away in a year, if you raise interest rates now to pull down the economy that could take a year to work through the economic chain. by the time the economy is already slowing down because of supply shock, you would be slowing it down even more by having raise interest rates. 10 years ago, the european central bank found itself in a similar situation where they raise interest rates. they created a recession. that is the first mistake central banks try to avoid, responding -- overreacting to a supply shock.

the economy now is adding jobs. you hear about labor shortages come about the tightness of the labor market. you see wages going up. the fed does not want to under react to a demand shock. we have seen a lot of demand into the economy from stimulus checks or just from natural reopening of the economy. people have money they have saved up. they are looking to spend it, to travel. will that be a one off and things will come back on their own? if people have higher wages, is spending going to rise? is consumption stronger? those are the questions the fed is going to wrestle with next year. they have made clear they do not want to overreact to a supply shock but it is difficult now for the fed and congress to understand where demand is going to be. are we going to see the same

equilibrium we have before the pandemic or is the labor market different? is the structure of the labor market different? are there fewer workers going forward? that would suggest the fed should raise interest rates. the fed fed right now wants to give more time before they make these decisions about changing interest rates, about raising interest rates to see if the economy is going to be able to get back to where it was before the pandemic. if it did, that would suggest it could go slower with raising interest rates. host: let's take some calls for nick timiraos of the wall street journal. go ahead. caller: good morning and thanks for taking my call. my question might be simple, but over the past four years the past administration did nothing but help wall street and the

economy for the big business. so they -- are they ever going to do anything for the common man, the regular person? they protected everything during covid while there were food lines. people were starving and dying. host: we got your point. stir timiraos -- mr. timiraos? guest: that is the challenge especially for the fed because fed tools work through financial markets. they work through the banking system, through bond markets to try to spur more spending, more investment by lowering the cost of credit. that works through people taking out loans to invest or spend money. they are sensitive to that critique, that every time we go into a recession it seems like

we meant -- create a new crop of billionaires because of all of this easy money. what is interesting about the response to the recession, the pandemic shock in 2020, is congress spend more money up front. the fed is sometimes referred to as printing money, crating money out of thin air -- creating money out of thin air. they are increasing their balance sheet. this time, the treasury department and congress spent a lot of money. a lot of the benefit from the fed's decisions to keep interest rates low resulted in lowering borrowing costs for the u.s. government, which was in turn going out and spending money on ppp loans to small businesses, assistance checks to the $1400 checks earlier this year.

that went to the citizenry. we have spent a lot more money and this shock compared to 2008. that has been one difference in the response time. host: the next call comes from park in north carolina. caller: good morning. first i want to say c-span is wonderful. this program is probably the only true sense of journalism out there. my question is how can we sustain a debt-based economy? host: why do you ask that? caller: because our -- it is hard for me to say. i'm not exactly an economist. if our money is based on debt and the more money we make, the

more debt we have, how can we pay back the debt? how do we sustain it? guest: we spent a lot of money this year and last year in response to the pandemic. the u.s. has a larger data. it has a larger debt burden. the cost of servicing that debt will be greater than in the past when the fed has to raise interest rates. that has to be a concern. over the past decade, we have gotten used to this idea that globally interest rates are going to be lower and maybe that will continue. if it does not, if the fed had to raise interest rates, there are questions about how that would influence the economy because the u.s. government would have to spend more that it has in the past to service the debt. it is important not necessarily to compare the debt of a large

superpower to the debt of a family. the idea of a household needs to make sure they can pay off every month to keep credit card balances manageable, you do have to pay back eventually. with sovereign debt, it is not quite the same. you want to make sure you are able to service the interest payments. you do not want to add to that. you do not want debt to be growing just because you are borrowing to pay interest costs, but you do not actually after pay down the debt. the u.s. is in an enviable situation globally because we are the reserve currency. the dollar is seen as the reserve currency, so a lot of people want to own dollar-denominated assets. they want to buy u.s. treasury securities, so that has kept our borrowing costs lower than they would otherwise be. host: michael is calling in from michigan. you are on with mixed -- nick

timiraos. caller: how does the fed affect the savings rate and cd rates? guest: with interest rates as low as they have been, it has kept the rates on savings accounts and certificates of deposits low. this low rate environment has been difficult for people who budgeted to live off of interest from savings accounts. on the other hand, markets have been booming. -- asset markets have been booming. if you own property and some of these land constrained cities, prices have been soaring. it can be a double-edged sword for people. host: doug, alaska.

go ahead with your question or comment about the federal reserve. caller: i had a question on the democrats' proposal to pay for their programs by taxing corporations and the rich. does that pay for their programs? guest: it depends on how -- tax rates are one consideration that companies have to make when they decide where they're going to look at themselves or what they are going to produce. i would leave it to the independent budget analysts to do the been counting on that and calculate whether this will pay for -- if they are going to be able to pay for that spending. for the fed, it is an interesting question right now. last year powell was taking the view that we year to spend more money to get everyone through

the pandemic. there were concerns that businesses were going to fail, that they did not have asset -- access to borrowing markets, that people would lose their jobs and be unemployed. there is evidence when that happens people lose skills, so powell was outspoken last year, saying we need to spend more money. when the fed has cut interest rates to zero and is buying a large quantity of bonds, there may not be much the fed can do. now he has taken a more neutral position. if we were to see more federal spending next year, to the extent that increases demand, you have heard some of fed officials -- you have heard fed officials saying we do not need that now. we do not need to increase demand now because supply chains

are stretched. the biden administration and treasury secretary have said this will not add to the debt. she has shed -- said she does not think it would have inflationary impact. host: there was a meeting in rome. 15% global corporate tax was agreed upon by all these countries. is that feasible? what do corporations think about this? guest: there are some companies that say the more there is a loving -- level playing field, the better. there has been a race to the bottom over the past 20 years, but the devil is in the details. it is still uncertain how this is going to shake out domestically, how much of it has to go through congress, so there has been a lot of anticipation

and positive hopes this year that something might get done. there has maybe even been a little bit of a surprise as to how quickly the u.s. has been able to get by in -- buy in from the rest of the world, especially lower tax jurisdictions. it is a work in progress. host: lizzie, indiana. please go ahead with your question or comment. caller: thank you, c-span. i was wondering about inflation. i keep seeing republicans keep coming out and saying that these bills they are going to pass are going to cause more inflation. i tend to disagree with that, but i would like to hear your opinion on that. guest: it is a good question.

i'm not an economist. i do not write editorials, so i do not really have a view as to whether it is going to cause inflation, but the big question now is at what point do these supply chain bottlenecks repair themselves? businesses are optimized to make money. if there is demand they are leaving on the table because they cannot fill orders, because they cannot get inventory, they are going to find a way to improve their supply chains. the question is at what cost. are? they going to pay more money that would contribute to inflation in the short run. if supply chains get fixed or demand shifts from goods back to services, a lot would happens during the pandemic, we were all in our homes and may not be spending money in the way we were before on services. so a lot of spending over the

past 18 months went to goods. if you look at a chart of spending, consumption of goods, it is above where you would expect it to have been if the pandemic had not happened. services, whether going to movies or ballgames, that is below or you would expect it to be if the pandemic had not happened. the fed is hoping that goes back to its pre-pandemic pattern. that might take some pressure off supply chain's. -- supply chains. if it does not, the fed is going to have some tough decisions next year. one thing the fed pays a lot of attention to our look and see -- are what consumers and businesses think inflation is going to be in the future. they think expectations are important because they can become -- they have self-fulfilling properties. if you think properties are going to before percent higher year, you are going to bend --

demand more income. as wages rise, prices rise. if you get into that spiral, there is concern you will have inflation becoming more persistent. the fed wants to avoid that strongly. even if the fed is right and the pandemic will have a beginning, middle, and end can associate -- and end, so should this period of higher prices. if it changes expectations, you could have an issue where the fed has to respond by raising interest rates to slow down the economy. host: we have about a minute left. caller: my question is about bernanke. bernanke said he fundamentally changed how our system works.

it used to be dependent on savings. now the fed has clearly taken over interest rates and just dictates them to zero. that is why no one is saving anything in the banks at all. i was wondering if you have any thought about that major change. host: nick timiraos? guest: the question is whether bernanke changed that or the world changed. whether it was because of demographics or globalization, we have moved into a lower interest rate world. you could say the fed was manipulating interest rates by holding them at zero, but there is another school of thought that says interest rates, if not for the ability to take them negative, could have been lower. so the fed was responding to global shifts and the neutral rate of interest or interest

rate that is neither speeding up nor slowing the economy was lower than it had been in the past. you see this and other countries, too. even though they did not have a ben bernanke, they have lower interest rates. host: nick timiraos from the wall street journal has this morning's lead story in that paper. fed outlines stimulus program. we appreciate

next, a hearing on domestic terrorism with homeland security and fbi officials. witnesses address several topics including the rise of white supremacy, civil rights and the role of social media. they outline the agency's efforts to combat these issues before the house intelligence committee. this is about an hour and a half. [background noises]