· With bond-buying 'taper' in the bag, Fed turns a wary eye to inflation
The Federal Reserve on Wednesday is expected to detail plans to end its pandemic-era bond purchases by mid-2022 as policymakers shift their focus towards what, if anything, to do about a surge in inflation that is lasting longer than anticipated.
U.S. central bankers, in the minutes of their Sept. 21-22 meeting, signaled that a “taper” of the $120 billion in monthly asset purchases would be approved at this week’s gathering of the policy-setting Federal Open Market Committee.
Fed officials still largely hold that view. By some time in 2022 they anticipate that global supply bottlenecks will have eased, pandemic-fueled demand for goods among U.S. consumers will cool after massive spending on cars, motorcycles and appliances, and enough people will be pushing to return to jobs that the pace of wage and benefit increases will also subside.
The dilemma facing the U.S. central bank is whether inflation eases before policymakers feel compelled to step in with interest rate increases to curb it. Investors are acting as if the Fed’s patience will run out soon.
The Fed cut its overnight benchmark federal funds interest rate to the near-zero level last year in a bid to stem the economic fallout of the pandemic. Trading in federal funds futures currently show investors expecting up to three quarter-percentage-point rate increases in 2022; Fed officials as of September were split over whether there would even be one.
EYES ON POWELL
The Fed is due to release its policy statement at 2 p.m. EDT (1800 GMT). It will not issue new economic forecasts, so beyond the statement it will be up to Fed Chair Jerome Powell in his news conference half an hour later to strike a balance between the two sides of the central bank’s mandated goals of achieving maximum employment and stable prices.
This will be a critical communications moment for Powell whose term as Fed chief ends in February 2022. The White House has yet to announce whether the former investment banker will be reappointed to a second term.
The debate will then turn to how much more the job market can improve, how fast it can be done, and whether COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.
Reference: Reuters
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