The Fed Will Begin Reducing Market Assistance
Fed officials plan to begin slowing the monthly pace of their net asset purchases by the middle of next year, potentially putting the Fed in a position to increase interest rates at that time.
The Federal Reserve will begin lowering its substantial market support this month, signifying a much-anticipated policy change.
Fed officials also said that supply chain worries and the economy's reopening are causing "significant price increases in some sectors."
Throughout the majority of the pandemic, the Fed has acquired $120 billion in assets per month, helping to stimulate the economy and make borrowing easier by keeping long-term interest rates low.
Fed officials have repeatedly said that "much more progress" on inflation and job creation is necessary before they can begin "tapering" the enormous bond-buying program.
Monthly purchases of Treasury securities total $80 billion, with agency mortgage-backed securities totaling $40 billion.
On Wednesday, the Fed decided to begin lowering the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.
The asset purchases are likely to be entirely drained by the middle of next year, putting the Fed in a position to raise interest rates for the first time since the pandemic began.
"Supply and demand imbalances associated with the pandemic and the resumption of the economy have led in considerable price increases in some industries," Fed officials said in a statement issued Wednesday.
The speech also foreshadowed a minor but substantial change in the way the Fed considers inflation.
Officials at the Fed have long decided that pandemic-era inflation is "transitory" or only lasts a short period.
However, the Fed said on Wednesday that those increased prices are primarily due to economic circumstances "that are expected to be transitory," underlining how difficult it has been for Fed members to estimate how long inflation would last.
For months, Fed Chair Jerome Powell and other Fed officials have provided strong signals that the taper would most certainly begin in November if the economy continued to perform as expected.
Nonetheless, the decision comes at a vital point for the economy - and for the central bank, which is entrusted with encouraging full employment and ensuring price stability.
Inflation has risen quicker and lasted higher than the Fed, and the Biden administration predicted.
Officials allude to ongoing supply chain issues exacerbated by the coronavirus's delta variant.
They say that prices will not revert to the Fed's 2% annual target unless such backlogs are resolved. The Fed's preferred inflation metric was 4.4 percent in September.
Meanwhile, the labor market has underperformed, with weak job growth in August and September, emphasizing the economy's ongoing fragility in the face of the coronavirus.
Treasury Secretary Janet Yellen stressed that the most significant barriers to employment are child care problems and the ongoing pandemic.
Nonetheless, there are encouraging signs that the economy is on the approach of a job-creation boom.
Interest rates are the Fed's principal tool for battling inflation, which may rise or lower depending on the status of the economy.
However, Fed policymakers are wary of raising interest rates - and thereby chilling the economy - if doing so hinders job growth.
Only time will tell if Fed officials get the timing right.
The Fed's most recent economic forecasts showed officials boosting their expectations for a rate hike in 2022.
On the other hand, inflation has already been a subject of controversy in Washington and around the country.
Republicans argue that the Biden administration's excessive spending is causing rising costs. When the Fed decides to raise interest rates, it will be behind the curve.
Households are experiencing rising food, gasoline, rent, and other essential costs, placing pressure on the finances of some of the most vulnerable families.
In the meanwhile, the central bank is dealing with a variety of other issues.
Powell's term as chair expires in February, and the White House has yet to determine whether he will be reappointed or who will fill a number of other Fed board positions.
"I've been meeting with economic experts to see what the best solutions are," President Joe Biden said Tuesday during a news conference in Glasgow, Scotland.
"We have a number of viable choices, but I'm not willing to speculate just yet."
Two regional Fed bank presidents have resigned since the Fed's last policy meeting in September due to their stock-trading activity.
This led an independent inspector general to look into whether such actions violated ethical norms and the law.
In addition, the Fed announced a major tightening of its standards controlling top officials' financial activities.
The Fed moves closer to tapering asset purchases