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 cut cash aid at full speed as the business environment recovers from the pandemic shock.
Fed chairman Jerome H. Powell told a news conference that central bank bond purchases, which have supported the economy from the depths of the pandemic downturn, “still have a use, but it’s time for us to start decreasing them. “
This unusual openness came for a reason: Fed officials have tried to fully prepare the markets for their first pullback of huge economic support. Policymakers could announce a slowdown in their monthly purchases of government guaranteed securities as early as November, the next Fed meeting, and the program could end by the middle of next year, Powell said later. . He added that there was “very broad support” within the federal policy-making committee for such a plan.
Almost 20 months after the coronavirus pandemic first rocked America, the Fed is trying to guide an economy in which business has rebounded as consumers spend heavily, aided by repeated government and government checks. other advantages.
Yet the virus persists and many adults remain unvaccinated, preventing a complete return to normal activity. 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.
Mr. Powell and his colleagues are navigating these cross currents at a time of high inflation and the labor market, while recovering, remains far from fully strong. They are reflecting on when and how to reduce their support for monetary policy, hoping to avoid overheating the economy or financial markets while keeping the recovery on track.
“They want to start the exit,” said Priya Misra, global head of rate strategy at TD Securities. “They are warning the markets.”
Investors took the latest update in stride. The S&P 500 ended up 1% for the day, slightly above what it was before the Fed’s policy statement was released, and government bond yields fell, suggesting investors should saw no reason to drastically change their interest rate expectations.
The Fed is keeping its policy rate low since March 2020 and buying $ 120 billion in government guaranteed bonds each month, policies that work together to keep many types of borrowing low. The combination fueled lending and spending and helped spur stronger economic growth, while also contributing to record highs in the stock market.
But now officials believe the time has come to tiptoe away from such full-blown support. At the end of last year, policymakers set the bar lower for slowing buying than for raising interest rates. They just wanted to see “further substantial progress” towards their goals of stable inflation and maximum employment before giving up on asset purchases. Regarding the rate hike, officials have indicated that they would like to see inflation reach its target in the long term and a fully healed labor market.
Slowing down its short-term asset purchases could give the Fed more leeway to be more nimble going forward. Policymakers have indicated that they want to stop buying securities before moving interest rates above zero.
But Mr Powell tried to separate the two decisions clearly, signaling that changes in the key interest rate – the Fed’s most traditional and powerful tool – are not imminent.
“You are going to be a long way from satisfying the take-off test when we start to decline,” he reiterated on Wednesday.
Half of the Fed’s policymakers plan to hike rates close to zero next year. Officials on Wednesday released a new set of economic projections, showing 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 Fed’s 18 policymakers expect their interest rates to drop at the end of each year.
Nine Fed policymakers have forecast one or more rate hikes next year, up 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.
Projections also predicted faster price gains in 2021. 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.
Fed officials expected average inflation of 4.2% in the last quarter of 2021 before falling to 2.2% in 2022, according to the new forecast.
Central bankers try to predict how inflation will develop 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 factors that are pushing prices up today will lead to uncomfortably low inflation in the future – for example, used car prices were a big contributor to the 2021 increase and could fall as demand decreases. Lukewarm price hikes prevailed before the onset of the pandemic, and the same global trends that had weighed on inflation may once again dominate.
“Inflation expectations are terribly important, we spend a lot of time watching them, and if we saw them moving in a disturbing way,” then “we would definitely react to that,” Mr Powell said. “We don’t really see that now.”
The Fed’s second goal, full employment, 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.
“The process of reopening the economy is unprecedented, as is the shutdown at the onset of the pandemic,” Powell said Wednesday.
Given these uncertainties, the Fed is likely to act cautiously on raising interest rates. And while Mr Powell announced in November that the Fed would start slowing its bond purchases, even that is likely to change if the economy does not recover as expected – or if major risks materialize on the horizon. .
“The start of the reduction would be delayed if the debt ceiling deadlock is not resolved and the markets are boiling,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a research note to the outcome of the meeting.
Yet Mr Powell made it clear that the Fed was not equipped to come to the rescue if lawmakers couldn’t resolve their differences.
“It’s just very important that the debt ceiling is raised in a timely manner,” said Powell, adding that “no one should assume that the Fed or anyone else can protect the markets and the saving on failure “to” make sure we pay them, when they are due.