Fed Signals Asset Purchases Could End by Mid-2022

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Officials debate the mechanics of a plan to reduce $120 billion in monthly bond purchases at a September meeting, the Minutes show.

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new estimates released At the end of that two-day meeting, half of the 18 officials who attended expected the economy to need interest rate hikes by the end of 2022. In June, only seven officials forecast raising rates next year. The projections also showed that many officials expected slightly higher inflation next year than in June, and almost all expected a higher rate hike in 2023.

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of the fed post meeting statement Fed chairman Jerome Powell said at a news conference on September 22 that the language included “putting notice” in the past month that the reduction in bond purchases “may come as soon as the next meeting”.

Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December have not produced any recovery in recent memory. Inflation has soared this year, with so-called core prices, which using the Fed’s preferred gauge, pushed volatile food and energy categories to 3.6% in August from a year ago. The gains largely reflect disrupted supply chains, labor and material shortages and a rebound in travel linked to reopening the economy.

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A separate index of core inflation rose 4% in September from a year earlier, the Labor Department reported Wednesday, matching the year-over-year increase recorded in August. Overall consumer inflation grew at the fastest pace in 13 years in recent months, according to the Labor Department.

The Fed lowered its short-term benchmark rate to near zero in March 2020 when the US economy was hit by the coronavirus pandemic, and it has been investing at least $80 billion a month in Treasury bonds and $40 billion in mortgage bonds since June 2020. buying per month. Provide additional incentives.

Mr. Powell said last month that many executives thought the bond-buying program could end by the middle of next year, a somewhat quicker time than the Fed’s other experience easing a similar asset-buying program in 2014. Limit. “I think it will be a short period,” he said. In 2014 “the economy was much further ahead than it was when we tapped”.

Some officials are eager to end asset purchases to give them the flexibility to raise rates next year if needed, as they think inflation could run above the Fed’s 2% target. Officials do not want to be in a position where they are considering raising rates at a time when they are still promoting monetary stimulus by buying assets.

Fed officials conducted a three-part test a year ago to raise interest rates, which would require inflation to reach 2% and certainly exceed that to return the labor market to levels consistent with maximum employment.

In December, officials said they would buy bonds at the current pace until the economy moved toward its goal of bridging the loss of nearly 10 million jobs since the start of the pandemic and pushing inflation back to its 2%. Didn’t make “much further progress”. target over time. The Fed’s asset portfolio has more than doubled to $8.4 trillion from $4.2 trillion in February 2020.

Mr. Powell indicated in August that most executives thought they had completed their inflation progress test to reduce asset purchases, leaving the lack of employment as the remaining hurdle. The economy has added about 4.9 million jobs as of September – almost half of the shortfall that existed in December. The Labor Department reported last week that the unemployment rate fell to 4.8% in September, from 5.2% in August and 5.9% in June.

As for the labor-market target, “I think my own view would be that testing … everything is done,” Mr. Powell said.

write to Nick Timiros and [email protected]

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