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Fed officials signal the reversal of emergency pandemic support might come soon

Markets Insider
Markets Insider
 25 days ago

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Jerome Powell said the Fed is looking into how a digital dollar would work.
  • The Federal Reserve hinted Wednesday it might soon reverse its emergency asset purchases.
  • The purchases aided financial markets and supported the economic recovery since they started in March 2020.
  • If the recovery continues as expected, the Fed could start shrinking the purchases "soon," the central bank said.
  • See more stories on Insider's business page .

On Wednesday, the Federal Reserve inched closer to announcing its reversal of the pandemic-era support that's aided financial markets throughout the crisis, signaling the pullback could arrive before the end of the year.

The Federal Open Market Committee held interest rates near zero and maintained the size of its emergency asset purchases after meeting on Tuesday and Wednesday. The ruling extends the ultra-easy monetary policy set by the Fed in March 2020 to prop up the US economy.

The central bank has long indicated it will keep its support in place until "substantial further progress" toward stronger inflation and maximum employment were met. The recovery has since made progress toward both targets and officials could soon start the process of retracting the policy aid, the Fed said in a Wednesday statement .

"If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the central bank said.

The Fed has been buying at least $80 billion in Treasurys and $40 billion in mortgage-backed securities each month to support financial markets and ease monetary conditions. The purchases are the first policies set to be normalized, with interest rate hikes set to follow.

That tapering process is no easy feat. Financial markets largely expect a tapering announcement after the FOMC's November meeting. Starting the process even later would suggest the economy isn't as healthy as expected. And shrinking the purchases before the anticipated date could shock investors and trigger panic selling.

Fed Chair Jerome Powell noted in a Wednesday press conference the tapering process could be swift if the recovery holds strong. FOMC members could start shrinking the purchases as soon as their November meeting, and the taper could be completed just months later, Powell said.

"Participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate," he said, adding the committee hasn't made a decision on the exact timing.

The criterion required for the Fed to consider rate hikes are much more stringent. The timing and pace of the upcoming taper won't hint at when rate lift-off will arrive, Powell said.

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Economic projections updated by the Fed on Wednesday reveal the committee isn't united in its rate-hike timeline. Half of its 18 members expect the first rate hike to arrive next year, with three expecting rates to climb above 0.5%. The other nine see near-zero rates lasting through 2022.

The median projections practically ensure a rate hike will arrive by the end of 2023, with all but one member expecting higher rates that year.

Read the original article on Business Insider

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