The Federal Reserve announced Wednesday that it will soon begin slowing the pace of its monthly bond purchases, the first step in withdrawing the massive aid it had provided to markets and the economy.
The expansion of bond purchases will begin "later this month," the Federal Reserve's Monetary Open Market Committee said in its post-meeting statement. The process will reduce $ 15 billion each month – $ 10 billion in government bonds and $ 5 billion in mortgage-backed securities – from the current $ 120 billion the Fed buys each month.
The committee said the move was made "in light of the significant further progress the economy has made towards the committee's objectives since last December".
The declaration, which was unanimously adopted, stressed that the Fed was not on a set course and would adjust the process if necessary. (This is how tapering works)
"The committee believes that a similar reduction in the pace of net asset purchases is likely to be appropriate each month, but stands ready to adjust the pace of purchases if warranted by changes in the economic outlook," the committee said.
The move was in line with market expectations after a series of Fed signals that a program that was accelerated in March 2020 in response to the Covid pandemic would be phased out.
Markets reacted positively, stocks turned positive, and government bond yields gradually rose.
Along with the move to reduce inflation, the Fed also changed its view on inflation only slightly, admitting that the price increases were faster and more permanent than central bankers had forecast, but still did not abandon the use of the controversial word "temporary".
"Inflation has increased, largely reflecting factors that are expected to be temporary," the statement said. "Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to significant price increases in some sectors."
Many market participants had expected that the Fed would drop the transition language in the face of ongoing inflation gains.
"The Fed today unveiled its QE rejuvenation, as widely expected, but continues to insist that the rise in inflation is 'largely' temporary, suggesting that the doves are still in control," wrote Paul Ashworth, chief economist at the USA at Capital Economics.
Fed chief Jerome Powell said he expected inflation to continue to rise if supply problems persist and then decline again from mid-2022.
"Our basic expectation is that bottlenecks and bottlenecks in the supply chain will persist well into next year, as well as increased inflation," he said. "With the pandemic, the supply chain bottlenecks will decrease and growth will increase.
The statement also indicated that the economy is expected to continue to improve, especially after supply chain issues are resolved.
"Advances in vaccination and a relaxation of supply restrictions are expected to support continued growth in economic activity and employment, as well as a reduction in inflation," the committee said.
The FOMC voted not to raise rates from their near zero anchor, which is what the market expects.
The relationship between interest rates and tapering is crucial, and the statement stressed that investors should not view the reduction in purchases as a signal of impending rate hikes.
"We don't think it's time to raise rates," said Powell. "There is still ground to cover" before the Fed achieves its economic goals. He added that he wants the labor market "to continue to recover and we have very good reasons to believe that this will happen if the delta declines, which it is now".
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According to the current schedule, the reduction in bond purchases will be completed around July 2022. Officials have said they do not expect rate hikes until the cut is complete.
The markets were more aggressive on pricing, however, pointing to up to three price hikes at some point over the next year. That sentiment has cooled somewhat in recent days as Wall Street anticipated a more cautious Fed trying to offset slower growth and rising inflation.
Inflation has hit a 30-year high, fueled by a congested supply chain, high consumer demand, and rising wages due to chronic labor shortages. Fed officials claim inflation will eventually bounce back to its 2% target, but now say it could take longer.