As was widely expected, the Federal Reserve will begin dialing back its monthly asset purchases in response to high inflation that appears likely to persist longer than previously anticipated. Following the two-day Federal Open Market Committee meeting, the Fed said it will start reducing its monthly bond purchases by $15 billion, though the pace could be adjusted if necessary.
The post-meeting statement said, “The Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”
The FOMC statement noted “economic activity and employment have continued to strengthen,” but “the path of the economy continues to depend on the course of the virus.”
The FOMC voted to keep interest rates unchanged. Regarding monetary policy, the post-meeting statement said: “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” Fed Chair Jerome Powell previously stated the conditions for raising interest rates are far different than those for the tapering of asset purchases.
Immediately following the FOMC meeting, Fed fund rate futures implied 90% odds of a rate increase by December 2022.