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Federal Reserve expected to announce plan to taper asset purchases

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Federal Reserve expected to announce plan to taper asset purchases

The Federal Reserve is expected to announce that it will start phasing out its $120bn monthly bond-buying programme as it confronts more pronounced price pressures and predictions that interest rates will be lifted next year.

The US central bank’s Federal Open Market Committee will release its latest statement on Wednesday at 2pm Eastern Time, followed by a press conference by chair Jay Powell.

Economists expect the US central bank to declare it has achieved “substantial further progress” towards its goals of inflation that averages 2 per cent and maximum employment, and that it will begin dialling back the emergency policy settings put in place last year to offset the economic damage caused by the coronavirus pandemic.

The Fed has signalled it is likely to reduce its purchases of Treasury securities by $10bn per month and those for agency mortgage-backed securities by $5bn. If the process starts on November 15, as expected, the stimulus programme would cease altogether by June 2022.

The announcement comes amid inflationary pressures that have caught policymakers and economists by surprise.

Roaring consumer demand has collided head-on with acute supply chain disruptions, causing prices to surge in some sectors for longer than anticipated. Rising rents and wage pressures amid a severe shortage of workers have also given rise to concerns that inflation will prove stickier than the Fed’s “transitory” assessment currently suggests.

Conditions now warrant changes to the Fed’s statement, economists said, including some acknowledgment that supply-related issues risk impairing the economic recovery and that the central bank is monitoring incoming inflation data carefully.

No adjustments are expected to be made to the Fed’s main policy rate, which is tethered near zero, and Powell is likely to reiterate that the start of tapering is not a signal on the timing of future interest rate increases.

But that message has been challenged in recent weeks as investors have increased bets that the Fed will begin to raise rates soon after its stimulus programme ends in June.

The move corresponded with abrupt actions by a number of central banks around the world, including the Reserve Bank of Australia and the Bank of Canada, to tighten monetary policy.

Short-dated US government bonds have jumped sharply higher as a result, with the policy-sensitive two-year yield now trading just shy of its recent high of over 0.50 per cent. In early September, it hovered closer to 0.20 per cent.

Published at Wed, 03 Nov 2021 10:00:38 +0000

https://www.ft.com/content/d10c157f-5530-48a0-9c5f-afed19057d8a

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