Fed ‘May Soon’ Begin to Slow Asset Purchases, Rates Near Zero
Fed ‘May Soon’ Begin to Slow Asset Purchases, Rates Near Zero
The Federal Open Market Committee on Wednesday indicated the Federal Reserve may begin to slow its monthly purchases of $120 billion in debt purchases in the near future as it trimmed its outlook for economic growth this year and kept its benchmark lending rate at close to zero.
The central bank has been purchasing billions of Treasuries and asset-backed mortgage securities for more than a year to help bolster the world’s top economy as it weathered the COVID-19 pandemic.
The Federal Open Market Committee said after the end of its latest two-day meeting that inflation will continue to top its 2% target “for some time” as the economy progresses to its full-employment goal.
“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the FOMC said in a statement.
The Fed left the fed funds rate at between zero and 0.25%, which is where it has been since March 2020 when the pandemic slammed the economy.
According to the panel, gross domestic product is now expected to rise 5.9% this year, down from its June projection of 7%. It raised 2022’s forecast to growth of 3.8% from 3.3% previously and lifted its projection for 2023 to 2.5% from 2.2%.
This year’s unemployment rate is seen at 4.8%, up from 4.5% three months ago while the FOMC kept its 3.8% forecast for next year in place. Its view for 2023 remained at 3.5%.
Inflation is expected to finish the year at 4.2%, up from the view in June for 3.4% growth. The outlook for 2022 was lifted to 2.2% from 2.1% while 2023’s was left at 2.2%.
The bank’s view for core inflation for 2021 is now 3.7%, up from 3% earlier while next year was lifted to 2.3% from 2.1%. In 2023, core inflation is expected to advance 2.2%, above the earlier view of 2.1%.
FOMC Says Tapering May Soon Be Warranted
The Federal Open Market Committee’s statement Wednesday afternoon introduced the possibility of a taper announcement soon, possibly at the November meeting, but conditioned it on continued improvements in the economy.
“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the statement said.
The FOMC’s quarterly Summary of Economic Projections (SEP), released with its post-meeting statement, suggested that the economy is progressing at a pace that may allow for a rate increase by the end of 2022.
Here are some of the key takeaways from the updated SEP:
There were nine FOMC participants that see the first rate increase possible in 2022, compared with seven in the June SEP, allowing the median dot to shift upward and suggest one rate increase by the end of 2022.
In addition, now 17 participants see higher rates by the end of 2023, up from 13 in the previous SEP and all participants see higher rates by the end of 2024. The median dot sees rates near 1% by the end of 2023 and near 1.8% at the end of 2024.
The median outlook for real GDP was revised lower for 2021, while forecasts for the unemployment rate were higher.
The 2021 inflation outlook was lifted, with PCE inflation now seen at 4.2% and core PCE 3.7%, compared with 3.4% and 3%, respectively, in the June estimates. Inflation estimates for 2022 and 2023 were revised slightly higher.
The first economic expectations for 2024 show a return to 2% GDP growth and 3.5% unemployment, with inflation modestly above 2%.
