The Federal Reserve gave multiple indications Wednesday that policy adoption has been extremely easy since the start of the near-ending Covid pandemic, offering aggressive policy moves to deal with inflation. growth increases.
First, the Fed said it would accelerate the reduction of its monthly bond purchases.
The Fed will buy $60 billion in bonds each month starting in January, half of what it was before November and $30 billion less than it bought in December. The Fed cut $15 billion a month in November, double it in December, then accelerate the reduction even further in 2022.
Once it’s over, in late winter or early spring, the central bank is expected to begin raising interest rates, which were held steady at this week’s meeting.
Forecasts released Wednesday showed Fed officials expected three rate hikes in 2022, two next year and two more in 2024.
The Federal Open Market Committee’s moves, approved unanimously, represent a significant adjustment to the loosest policy in its 108-year history. The statement after the meeting noted the impact from inflation.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to rising levels of inflation,” the statement said.
The statement also noted that “employment growth has stabilized in recent months, and the unemployment rate
rate has decreased significantly. “
However, members have gone hawkish on policy moves, with members firmly leaning towards rate hikes. The “dot chart” of members’ individual rate expectations indicates that only six of the 18 FOMC members have fewer than three hikes over the next year, and none of the members see rates in their current position. at, anchor close to zero.
That vote came even as the statement reaffirmed that the Fed’s benchmark overnight borrowing rate would stay near zero “until labor market conditions reach levels consistent with the Committee’s assessment.” about maximum employment.”
The committee has reduced its economic growth forecast for this year, when GDP will rise 5.5% for all of 2021, compared with the 5.9% rate released in September. Officials also revised their forecasts. next year, raising growth in 2022 to 4% from 3.8% and slowing 2023 to 2.2% from 2.5%.
Both policy moves come in response to rising inflation, which is at a 39-year high for consumer prices. Wholesale prices rose 9.6% in November, the fastest on record in a sign of deepening and widespread inflationary pressures.
Fed officials have long emphasized that inflation is “transient,” which Chairman Jerome Powell has identified as unlikely to leave a lasting mark on the economy. He and other central bankers, as well as Finance Secretary Janet Yellen, have stressed that prices are exploding due to pandemic-related factors such as unusual demand outstripping supply but will eventually decrease.
However, the term became a derogatory one and the statement after the meeting dropped it. Powell announced the move during his congressional testimony last month, saying “it might be a good time to take that back and try to make it clearer what we mean.”
For Fed Powell, the tightening now marks a significant turnaround from the policy enacted just over a year ago. Called “flexible average inflation,” which means it will be content with inflation slightly higher or lower than the long-held 2% target.
The practical application of this policy is that the Fed is willing to let inflation heat up a bit with the benefit of completely healing the labor market from the impact of the pandemic. The Fed’s new policy aims to seek full and inclusive employment across race, gender, and economic sectors. Officials have agreed not to raise rates in anticipation of rising inflation, as the central bank has done in the past.
However, as the “temporary” narrative set in and inflation began to appear stronger and more durable, the Fed had to rethink its intentions and make structural changes.
Asset purchases tapered off in November, with a $10 billion reduction in Treasury purchases and $5 billion in mortgage-backed securities. That still makes the purchase volume for the month at $70 billion and $35 billion, respectively.
However, the Fed’s $8.7 trillion balance sheet has grown by only $2 billion over the past four weeks, with Treasury holdings up $52 billion and MBS actually down $23 billion. Over the past 12 months, treasury holdings have increased by $978 billion while MBS has grown by $567 billion.
Under the new terms of a program known as quantitative easing, the Fed will accelerate the reduction of its holdings until it is no longer added to its portfolio. That would bring QE to an end in the spring and allow the Fed to raise rates anytime after that. The Fed has said it likely won’t raise rates and continue to buy bonds simultaneously, as the two moves will work with cross-purposes.
From there, the Fed can at any time begin to reduce its balance sheet by selling securities outright, or, in the more likely case, begin to allow the proceeds from its holdings to be released. Their current bond flows out monthly at a controlled rate.
Powell will likely face questions at his 2:30 p.m. ET press conference about the future of the balance sheet, which has expanded by nearly $3.9 trillion since its early days. epidemic.
https://www.cnbc.com/2021/12/15/fed-will-aggressively-dial-back-its-monthly-bond-buying-sees-three-rate-hikes-next-year.html Fed will aggressively dial back its monthly bond purchases, project three rate hikes next year