Taper time: US Fed to start trimming monthly bond buys
Fed chief Jerome Powell says the US jobs market may improve enough to reach ‘maximum employment’ by mid-2022.
While United States Federal Reserve Chair Jerome Powell said at a press conference on Wednesday that he and his fellow policymakers expect the main drivers of inflation - namely supply chain bottlenecks and shortages - to persist well into next year, they do see price pressures eventually receding [File: Sarah Silbiger/Reuters]
The United States Federal Reserve is going to start dialing back some of the extraordinary support it has given to the nation’s economy since the coronavirus pandemic struck last year. But it signalled again that it is in no hurry to raise interest rates until the nation’s labour market has fully recovered from last year’s COVID-19 blow.
Last year, at the height of the pandemic, the Fed slashed interest rates to near zero and started buying bonds at a pace of $120bn a month. At the end of their two-day policy meeting on Wednesday, Fed officials voted unanimously to start tapering those bond purchases later this month.
“In light of the substantial further progress the economy has made toward the Committee’s goals since last December, 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,” the Fed said in its post meeting statement.
The Fed also said it would reduce bond purchases by a further $15bn in December and “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 taper announcement was widely expected – and so too was the unanimous vote to leave interest rates unchanged.
The Fed and its chief Jerome Powell are sticking to their script that they are in no hurry to raise interest rates even if inflation is running well above the central bank’s 2 percent target rate.
“Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy,” Powell told reporters during his post-meeting press conference.
“We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment both in terms of employment and terms of participation.”
Still not worried about inflation
US consumer prices increased 5.4 percent in September compared to the same period a year earlier. That rate matched June and July and brought the annualised inflation rate back to its highest level in 13 years.
While Powell said he and his fellow policymakers expect the main drivers of inflation – namely supply chain bottlenecks and shortages – to persist well into next year, they do see price pressures eventually receding.
“We continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that as it does inflation will decline to levels much closer to our 2 percent longer run goal,” said Powell.
US stocks responded to the Fed’s latest decision with the S&P 500 – a proxy for US retirement and college savings accounts – and the Dow Jones Industrial Average reaching fresh all-time highs.
The S&P 500 gained 0.65 percent to end at 4,660.64 points, the Dow rose 0.29 percent to 36,158.27 and the tech-heavy Nasdaq Composite Index gained 1.02 percent to end the session at 15,809.65.
On the jobs front, Powell said that it is possible that the US labour market could reach “maximum employment” by the middle of next year. But he also told reporters it’s important to not act like he has a magic crystal ball that can predict the future.
“We’re in a different world now,” he continued. “The pandemic recession was the deepest and the recovery has been the fastest and wages didn’t really go down. And you know, real incomes were more than fully replaced by fiscal policy. All of this is completely unusual.”
A record 4.3 million Americans quit their jobs in August – that is nearly 3 percent of all employed workers in the US – while the number of job openings hovered near a record 10.4 million.
To attract workers, businesses have responded by offering signing bonuses or fatter paycheques. In September, the employment cost index, which measures wages, salaries and benefits, rose 1.3 percent – the biggest jump on records dating back 20 years.
But Powell said the economy is showing no signs of a “wage-price spiral” that could force the Fed to act sooner than expected and raise interest rates to contain inflation.