Federal Reserve policymakers said Wednesday the central bank will begin pulling back its financial support now that the economy is strong enough.
The Fed’s Federal Open Market Committee (FOMC) left benchmark interest rates near zero, as expected, but said it would begin reducing the pace of its monthly asset purchases by $10 billion for Treasury securities and by $5 billion for mortgage-backed securities. The so-called tapering of the asset purchases was widely anticipated as a first step toward controlling inflation. Consumer prices are rising at the fastest pace in decades.
When the pandemic began last year and the economy faltered, the committee slashed the target range for the benchmark federal funds rate to 0 to ¼ percent, and embarked on a massive program of monthly asset purchases, including $80 billion in Treasuries and $40 billion of mortgage-backed securities. At the pace of reductions the FOMC just announced, the tapering should end in June.
Now the focus is on when the Fed will start raising interest rates in a further bid to quell inflation. That doesn’t look to be anytime soon, however, as the FOMC stressed that elevated inflation largely reflects factors—including pandemic-related supply and demand imbalances—that are “expected to be transitory.”
“It is time to taper, we think, because the economy has achieved substantial further progress toward our goals,” Fed Chair Jerome Powell said at a news conference following the committee’s two-day meeting, citing progress in the job market and the broader economy. “We don’t think it’s time yet to raise interest rates. There is still ground to cover."
While the FOMC said progress on vaccinations and an easing of supply constraints should support gains in economic activity and employment, it noted in a statement that “risks to the economic outlook remain,” and left itself some wiggle room on the tapering schedule. It said “it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
That means “if inflation accelerates, the Fed could accelerate the reduction in its monthly asset purchases,” wrote Ryan Sweet, an economist at Moody’s Analytics, in a commentary. “Similarly, if economic growth begins to deviate noticeably from the Fed’s baseline, the Fed could slow the pace of tapering.”
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