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The U.S. Federal Reserve has announced plans to begin closing down its program, begun in March 2020, of buying $80 billion a month in U.S. bonds and $40 billion in mortgage bonds, the Fed’s Open Market Committee announced last week.
The Fed will cut purchases by $15 billion in each of November and December, the committee said.
If the pace continues, the program would end in June 2022, clearing the way for the Fed to raise interest rates.
The central bank has said it will not raise rates while continuing to goose the economy with bond purchases, a tactic that could worsen inflation (“Fed Must Shift Policy Quicker, Economists Say,” 14 Sep 2021).
However, the Fed will speed or slow the program’s demise “if warranted by changes in the economic outlook,” Fed chair Jerome Powell told a 3 November news conference.
Earlier this year, economists widely expected the Fed to time the program’s close to the end of 2022, The Wall Street Journal reported (“Will the Fed Reduce Bond Purchases Later This Year,” 3 Aug 2021).
However, “we need to be in a position to act in case it becomes necessary to do so,” Powell said.
The committee held the Fed’s key interest rate at 0.25 percent in its meeting this month and Powell again downplayed rumors of an imminent rate increase that have arisen as other nations’ central banks have jacked rates recently. (See related story in this issue.)
U.S. financial markets have been floating on the assumption that interest rates will remain low for some time yet. If the Fed were to shift its strategy and bump rates suddenly, it likely would disrupt markets, perhaps dramatically.
“We think we can be patient” about interest rates, Powell said. However, “if a response is called for, we will not hesitate.”
The U.S. Consumer Price Index rose by 4.4 percent in September, with core prices—which do not include food or energy—up 3.6 percent.
From April through September, the Fed said rising inflation rates were “largely reflecting transitory factors,” such as kinks in supply lines.
Last week, Powell began to extricate the central bank from implications of that language.
The Fed committee wants to “take a step back from ‘transitory’,” Powell said, a word that “means different things to different people.”
“For some, it carries a sense of ‘short-lived’” or a period “measured in months…for us, ‘transitory’ has meant that it will not [result in] permanently or very persistently higher inflation,” he explained.
In qualifying the language, Powell noted that “inflation has come in higher than expected and bottlenecks have been more persistent and more prevalent.”
The Fed “hopes” to see inflation easing by next spring or summer and expects the labor market to reach the Fed’s goal of “maximum employment” in the second half of 2022, a benchmark that would justify interest rate increases, the Fed has said.
TREND FORECAST: U.S. equity markets reached new highs after Powell announced the Fed will begin to taper its bond purchases, indicating the stock players will keep rolling the dice for as long as they can find any good news to justify keeping the game going. And as Gregory Mannarino details in this week’s Trends Journal article, the Fed tapering is a “MELTUP.”
Troubled companies with junk-rated bonds have survived the COVID War on the Fed’s generosity. As the Fed seriously winds down its bond-buying, more and more of those companies will flounder, dragging down the bond market and stocks with it.
This will be a prelude to a major market correction that will be sparked when the Fed begins to raise interest rates.
The higher the rates rise, the deeper the markets will sink. We maintain the equity and economic collapse will strike when Fed rates hit the 1.5 percent range… up from near zero now.