Fed announces cut bond purchases “soon” and rate hike next year

  • Fed policymakers predict decline in bond purchases to end in 2022
  • Powell links withdrawal to September jobs report
  • Inflation is expected to be above Fed target for four years

WASHINGTON, Sept.22 (Reuters) – The U.S. Federal Reserve said on Wednesday it would likely start cutting its monthly bond purchases as early as November and signaled that interest rate hikes could follow faster than expected as the US central bank is turning away from the policies of accelerating pandemic crisis.

The slight hawkish trend was signaled in a new policy statement and economic projections that showed nine of the 18 Fed officials were ready to raise interest rates next year in response to inflation as the bank Central now expects it to hit 4.2% this year, more than double its inflation rate. Target rate of 2%.

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A withdrawal of the $ 120 billion in monthly central bank bond purchases could begin after the November 2-3 policy meeting as long as US job growth through September is “reasonably strong, Fed Chairman Jerome Powell said at a press conference following the central bank’s latest statement. The US non-farm payroll report for September will be released in early October, the last such report before Fed policymakers meet again in November.

“It wouldn’t take a knockout or a super strong jobs report” to start the “taper” of the bond buying program, with the process expected to be completed by the middle of next year, said Powell.

This calendar has taken on increased importance. The Fed wants its purchases of treasury bills and mortgage-backed securities to end before it starts to increase borrowing costs, and new projections have shown officials were ready for that to happen in 2022 .

The Fed now expects inflation to exceed its target for four consecutive years. Even though the overshoot is slight, at 2.2% in 2022 and 2023 and 2.1% in 2024, it has started to change their minds among policymakers who have been divided on whether the larger risk is the continuing impact of the pandemic on the economy, marked by unemployment or the threat of an explosion in inflation.

For now, the Fed still expects to be able to boost employment while controlling inflation, which it sees as the result of “transitional” forces that will ebb on their own.

Indeed, interest rate hikes are expected to continue slowly, pushing the Fed’s overnight key rate to 1% in 2023, then to 1.8% in 2024 – still seen as a loose monetary policy that will allow the unemployment rate to fall back to its previous level. – pandemic level of about 3.5%.

Policymakers have, however, lowered their expectations for economic growth this year, with gross domestic product expected to rise 5.9% from the 7.0% forecast in June, largely due to the new wave. of coronavirus cases.

The Federal Reserve Building is pictured in Washington, DC, the United States on August 22, 2018. REUTERS / Chris Wattie / File Photo

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Overall, the Fed’s statement and projections are “probably a little more hawkish than many would have expected, essentially acknowledging that if the economy continued to grow as we have seen, it would justify a decrease.” said Sam Stovall, chief investment officer. strategist for CFRA Research in New York. “You could say this is an interim cut announcement even though they lowered their GDP forecast for 2021.”

Powell told reporters that financial conditions will remain accommodative even after the Fed halted asset purchases and stressed that the decision on the bond purchase program was separate from any action on interest rates.

The Fed on Wednesday kept its current target interest rate in a range of 0% to 0.25%.

US stocks extended their gains after the release was released before falling later in the afternoon, with the S&P 500 Index (.SPX) closing about 1% higher. Yields on the US Treasury fluctuated as the yield on the US 10-year benchmark bond declined slightly.

SLOWING RECOVERY

The Fed’s September policy statement was widely expected to signal the coming end of bond purchases it made to mitigate the economic impact of the pandemic.

Fed officials said last December that they would continue to buy bonds at the current rate until there is “further substantial progress” on the central bank’s targets for maximum employment. and inflation.

The benchmark inflation index was wiped out, Powell said on Wednesday, and the employment standard “anything but met.”

But it is in their broader economic outlook that Fed policymakers have made a less expected change.

Their inflation outlook has jumped 0.8 percentage point for 2021 and the expected year-end unemployment rate has risen from previous forecasts by policymakers in June. In turn, two officials moved ahead to 2022 on their planned timeline to slightly raise the Fed’s overnight benchmark interest rate from the current level, enough to bring the median projection to 0.3% for the next year.

The decision to lower GDP growth expectations for 2021 reflected fears the coronavirus could weigh on the economy. Growth forecast for next year has slipped from 3.3% to 3.8%, with spending simply being carried over to the months ahead, when the virus is expected to recede.

“The sectors most affected by the pandemic have improved in recent months, but the increase in COVID-19 cases has slowed their recovery,” the Fed said in its policy statement.

Reporting by Howard Schneider; Additional reporting by Jonnelle Marte and the US Finance and Markets team Breaking News Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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