By Ann Saphir
(Reuters) -U.S. central bankers signaled they could start reducing their crisis-era support for the economy in mid-November, though they remain divided over how much of a threat high inflation poses and how soon they may need to raise interest rates in response, minutes from their Sept. 21-22 policy meeting showed.
“No decision to proceed with a moderation of asset purchases was made at the meeting, but participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” according to the readout of the meeting, which was released on Wednesday.
Policymakers discussed cutting purchases of Treasuries by $10 billion a month and those of mortgage-backed securities by $5 billion a month, the minutes said, though “several” participants preferred a faster reduction.
If a decision to begin tapering takes place at the Fed’s Nov. 2-3 policy meeting, the minutes said, the process could begin in either the middle of that month or mid-December.
With the economy set to grow this year at its fastest pace in decades, inflation riding well above the Fed’s comfort zone and the labor market much healed from the devastation of the coronavirus pandemic, Fed Chair Jerome Powell and colleagues want to start cutting back the $120 billion in monthly asset purchases the central bank has been making to spur the economic recovery.
FOCUS ON RATES
With the wind-down in asset purchases imminent, attention now shifts to the timing of future interest rate hikes.
The Fed has promised to keep its benchmark overnight lending rate at the current near-zero level until the economy reaches full employment, and inflation has not only reached its 2% goal but is on track to stay modestly above that level for some time.
The central bank set those parameters when inflation had been running below 2% for years, and the big challenge was seen as lifting it up rather than tamping it down.
But now, the opposite problem may be emerging, as pent-up consumer demand fuels spending in a reopening economy and businesses, hobbled by supply bottlenecks, struggle to keep up.
In forecasts released alongside the September policy statement, half of Fed policymakers thought a rate hike would be needed before the end of next year, with all but one forecasting a first rate hike before the end of 2023.
Key for investors – and the millions of Americans who still can’t find jobs – is the question of whether policymakers will need to begin hiking rates earlier to stop inflation from spiraling upward, potentially sacrificing labor market gains in the process.
Powell has played down the possibility of being forced into that uncomfortable position.
But the data may be trending against him. U.S. consumer prices rose 5.4% in the 12 months through September https://www.reuters.com/world/us/us-consumer-prices-increase-solidly-september-2021-10-13, the U.S. government reported on Wednesday, and traders of interest rate futures boosted their bets that the Fed would have to start raising rates by next September.
In the minutes, “various” policymakers thought that economic conditions would likely justify keeping rates near their current level for “the next couple of years.” A “number,” however, felt rates would need to rise by the end of next year because they felt it would have reached full employment; “some” also thought inflation would remain elevated with risks to the upside, the minutes showed.
(Reporting by Ann Saphir, Lindsay Dunsmuir, Jonnelle MarteEditing by Dan Burns and Paul Simao)
The post Fed lays out plan for tapering bond-buying program appeared first on Morningology.
