Federal Reserve officials said on Wednesday they plan to slow down soon the asset purchases they have used to support the economy and predicted they could raise interest rates next year, sending a clear signal that policymakers are preparing to move away from full cash aid. as the business environment recovers from the pandemic shock.
“If progress continues overall as planned, the Committee considers that a moderation in the pace of asset purchases may soon be warranted,” said the Federal Open Market Committee in its September statement. The new wording removed wording that had promised to assess progress in “next meetings”, suggesting that a formal announcement of the slowdown could come as early as the next central bank meeting in November.
Fed officials face a complicated backdrop nearly 20 months after the coronavirus pandemic first rocked the U.S. economy. Business rebounded with consumers spending heavily, aided by repeated government stimulus checks and other perks. But the virus persists and many adults remain unvaccinated, preventing a full return to normal.
External threats are also looming, including shocks in the Chinese real estate market which have strained financial markets. In the United States, partisan bickering could jeopardize future government spending plans or even destabilizely delay a needed increase in the debt ceiling.
Fed Chairman Jerome H. Powell and his colleagues are navigating these headwinds at a time of high inflation and the labor market, while recovering, remains far from full strength . They are wondering when and how to reduce their support for monetary policy, hoping to avoid economic or financial overheating while keeping the recovery on track.
“The sectors most affected by the pandemic have improved in recent months, but the rise in Covid-19 cases has slowed their recovery,” the Fed said in its statement on Wednesday.
The Fed has been keeping interest rates at their lowest since March 2020 and buying $ 120 billion in government guaranteed bonds each month, policies that work together to keep many types of borrowing low. This has boosted lending and spending and spurred economic growth. Officials have signaled that slowing bond purchases would be their first step towards a more normal policy environment.
Mr Powell, speaking at a press conference after the meeting, said Fed officials expect the economy to continue to grow strongly and the central bank will continue to provide support as well. long as needed. But he said policymakers believed it would soon be time to slow down their bond purchases, bluntly saying a plan to do so could be announced as early as November.
“Our asset purchases have been a vital tool,” said Powell, adding that Fed officials believe the economy has made enough progress towards the central bank’s targets of full employment and stable inflation that ‘It may be wise to start cutting back on these purchases “if progress continues.
“My view would be that the substantial progress test for the job is almost met,” said Powell. “I think if the economy continues to grow broadly as expected, and the overall picture is also appropriate for that, I think we could easily move forward at the next meeting – or not, depending on whether we believe that these tests are satisfied. “
Policymakers also discussed the pace of the slowdown in asset purchases, Powell said, with officials largely expecting the overall bond-buying program to end by mid-market. next year.
Business and Economy
“They want to start the exit,” said Priya Misra, global head of rate strategy at TD Securities. “They are warning the markets.”
The central bank is trying to separate its plans for the federal funds rate – the Fed’s most traditional and powerful policy tool – from its approach to bond buying. Mr Powell said the policy rate would likely stay low for some time.
Officials on Wednesday released a new set of economic projections, setting out their forecasts for growth, inflation and fund rates through the end of 2024. These included the “dot plot” – a set of individual estimates anonymous showing where each of the 18 Fed policymakers expect their interest rates to drop at the end of each year.
Half of policymakers expected one or more interest rate hikes by the end of 2022, with nine pencils in a rate hike next year, down from seven when the projections were last released in June. This was the first time the Fed has released projections for 2024, and officials expected rates to settle at 1.8% by the end of this year.
Fed officials expected average inflation to be 4.2% in the last quarter of 2021 and 2.2% in 2022.
Inflation has risen sharply in recent months, elevated by supply chain disruptions and other pandemic-related quirks. The Fed’s favorite measure, the Personal Consumption Expenditure Index, climbed 4.2% in July from a year earlier.
But questions arise as to the evolution of inflation in the months and years to come. Some officials fear it will remain high, fueled by heavy consumption and new pricing power from companies, as consumers come to expect and accept higher costs.
Others fear that the same one-off events driving up prices today will lead to uncomfortably low inflation down the road – used car prices caused much of the 2021 increase and could go down, for example. . Lukewarm price hikes prevailed before the onset of the pandemic, and the same global trends that had weighed on inflation may once again dominate.
Too high or too low inflation would be a problem for the Fed, which targets annual price gains of 2% on average over time.
Congress has given the central bank two tasks: it is supposed to promote both price stability and maximum employment.
This second objective also remains elusive. Millions of jobs remain missing from before the pandemic, even after months of historically rapid job gains. Officials want to avoid raising interest rates to cool the economy before the labor market is fully healed. It’s unclear when that might be, as the economy has never recovered from the lockdowns brought on by the pandemic before.
Slowing down and then stopping bond buying could give the Fed some leeway, allowing it to raise interest rates relatively quickly if it appears that inflation is rising in a way that is likely to be sustained. Officials have signaled that they would prefer not to raise interest rates until bond buying stops.
But the central bank has been cautious in announcing its plans for the so-called “taper”. In 2013, when a former Fed chairman suggested that a post-financial crisis bond buying program would slow down, he turned global markets upside down in what has become ‘taper tantrum’.
Ahead of Wednesday’s announcement, most economists expected the Fed to officially announce a cutback plan at its next meeting, scheduled for November 2-3.