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Fed alerts that a tapering of bond purchases may start quickly, break up between the 2022 hike

The Marriner S. Eccles Federal Reserve building in Washington, DC, USA on Friday, September 17, 2021. President Biden's economic agenda risks being delayed for weeks or months in Congress due to tax, health and other issues Problems remain unresolved and continue to be debated between the progressive and moderate wings of the Democrats. Photographer: Stefani Reynolds / Bloomberg

Stefani Reynolds / Bloomberg

Federal Reserve officials signaled that they would likely begin scaling back their bond-buying program soon and showed a growing propensity to hike rates in 2022.

If progress on the Fed's employment and inflation targets continues "broadly as expected, the committee believes that a slowdown in asset purchases may soon be warranted," the US Monetary Open Market Committee said. The central bank held a two-day meeting on Wednesday in a subsequent statement.

The Fed also released updated quarterly projections showing that officials are now evenly divided on whether or not the median estimate of FOMC participants is appropriate to raise interest rates as early as next year. In June, the median projection showed no rate hikes through 2023.

Fed Chairman Jerome Powell will hold a virtual press conference at 2:30 p.m. in Washington to discuss the Federal Reserve’s first steps to withdraw pandemic emergency aid to the economy.

His performance is being analyzed by both investors and the White House: the Federal Reserve Chairman's term expires in February and President Joe Biden is expected to decide in the fall whether or not to reappoint him for another four years.

"We are seeing a Fed becoming more aggressive," said Diane Swonk, chief economist at Grant Thornton LLP, in an interview with Bloomberg Television after the statement was released.

US stocks rose slightly while 10-year Treasury yields had maintained an earlier decline. The dollar stayed lower after the decision.

New projections

The FOMC decided to keep its target rate range at zero to 0.25% and to continue buying government bonds and mortgage-backed securities at a pace of $ 120 billion per month. The vote was unanimous.

For the first time, forecasts for 2024 were also published, with the median suggesting a federal funds rate of 1.8% by the end of the year. The median for 2023 rose from 0.6% in the June projection to 1%.
Further findings from the prognosis (median estimate):

The FOMC median projection for the inflation rate in 2022 rose from 2.1% in June to 2.2%; kept the forecast for 2023 at 2.2% unemployment 3.8% in 2022, 3.5% in 2023; no change from the June forecast GDP growth of 3.8% in 2022, 2.5% in 2023, both higher than previous projections

The Fed also said it will double the per-counterparty limit on its overnight reverse repurchase agreement to $ 160 billion a day.
The US unemployment rate fell to 5.2% in August, well below the April 2020 high of 14.8%. But it's still above the 3.5% rate it saw in February 2020, just before the pandemic broke out. Fed officials said they expect to keep the fund rate close to zero "until labor market conditions reach levels consistent with the maximum employment committee estimates".

According to the Fed's preferred metric, inflation was 4.2% in the twelve months to July, well above the central bank's target of 2%. Many Fed officials have announced that they will decline to around 2% after addressing temporary supply chain disruptions due to the pandemic, although several also cited the rapid price hikes as a reason to start raising interest rates as early as next year.

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