By Yasin Ebrahim
Investing.com – The Federal Open Market Committee detailed plans to begin scaling back asset purchases later this month, with a view to ending its bond-buying program by June next year while holding interest rates steady.
The monthly bond purchases of $120 billion — $80 billion in Treasuries and $40 billion in mortgage-backed securities – would be trimmed by $15 billion a month.
Under the taper plans, the Fed will reduce monthly Treasury purchases by $10 billion and mortgage-backed securities by $5 billion. That puts the Fed on track to end its bond-buying program by mid-2022.
The pace of bond-buying may change depending on incoming economic data, the Fed said.
At the conclusion of its two-day policy meeting on Wednesday, the Federal Reserve kept its benchmark rate in a range of 0% to 0.25%.
At the onset of the pandemic last year, the Fed resumed its Financial Crisis-era bond purchases, or quantitative easing program, to cushion the economy from the pandemic fallout.
As the economy rebounded, the central bank set a bar of “substantial further progress” on inflation and the labor market that needed to be met to allow it to begin removing or slowing some of its emergency stimulus, including quantitative easing.
But the Fed has faced criticism by some who suggest the central bank has been too slow to remove its accommodative measures in the wake of elevated inflation.
The 10-year inflation breakeven, a key indicator of inflation expectations over the next 10 years, rose to a more than 3-year high recently. The latest update on the Fed’s preferred measure of inflation, the core personal consumption expenditures price index, was at 3.6%, well above the Fed’s 2% target.
The Fed, however, has adopted a new framework that would allow inflation to run above its target to make up for years of inflation trending below target.
In a sign that market participants appear to be losing faith that the Fed will continue to allow inflation to run hot for much longer, they are now pricing nearly three rate hikes for 2023, according to Investing.com’s Fed rate monitor tool
That is well ahead of the Fed’s current projection for a single rate hike by late 2022 or early 2023.
The bulk of the inflationary pressures have been driven up by wage pressures — as the supply of labor, or participation rate, has been slow to recover from the pandemic – and supply-chain issues increasing costs for both consumers and producers.
In its September meeting, the Fed said that elevated inflation was “largely reflecting transitory factors,” and reiterated that the labor supply and demand imbalance as well as supply bottlenecks would enviably ease.
Market participants are expected to shift attention to Fed Chairman Jerome Powell’s press conference at 2.30 PM ET (1830 GMT) , for more insight into the Fed’s plan to taper its bond purchases as well as clues on whether the the pace of inflation has altered the Fed’s view on the path of rate hikes.
“We think Chair Powell will again stress that the Committee is a long way from its goals, and therefore a long way from a meaningful discussion on when to raise interest rates,” Morgan Stanley (NYSE:MS) said in a recent note.
Fed Keeps Rates on Hold, Set to Begin Bond Buying Taper This Month
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