The Federal Reserve gave multiple indications Wednesday that policy adoption has been extremely easy since the start of the near-ending Covid pandemic, offering aggressive policy moves to deal with inflation. growth increases.
First, the central bank said it would accelerate the reduction of monthly bond purchases.
The Fed will be buying $60 billion in bonds a month starting January, half the amount it was before November’s collection and $30 billion less than it bought in December. The Fed dropped $15 billion a month in November, double in December, which will then accelerate the decline further into 2022.
Once it’s over, in late winter or early spring, the central bank is expected to begin raising interest rates, which were held steady at this week’s meeting.
Forecasts released Wednesday showed Fed officials expected three rate hikes in 2022, two next year and two more in 2024.
“Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” Chairman Jerome Powell said at a news conference after the meeting. meeting.
The Federal Open Market Committee’s moves, approved unanimously, represent a significant adjustment to the loosest policy in its 108-year history. The statement after the meeting noted the impact from inflation.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to rising levels of inflation,” the statement said.
The Committee sharply increased its inflation outlook for 2021, pushing it to 5.3% from 4.2% for all goods and 4.4% from 3.7% excluding food and energy. For 2022, expectations are now 2.6% for headline and 2.7% for core, both up from September.
At the same time, the unemployment rate forecast for 2021 has dropped to 4.3% from 4.8% in September.
The statement noted that “employment growth has stabilized in recent months, and the unemployment rate
rate has decreased significantly. “
However, members have gone hawkish in policy moves, with members firmly leaning towards rate hikes. The “dot chart” of individual member’s rating expectations indicates that only six of the 18 FOMC members have less than three increases in the coming year, and none of the members see the ratio still in its current position, given anchor close to 0.
That vote came even as the statement reaffirmed that the Fed’s benchmark overnight borrowing rate would stay near zero “until labor market conditions reach levels consistent with the Committee’s assessment.” about maximum employment.”
The committee has reduced its economic growth forecast for this year, when GDP will rise 5.5% for 2021, compared with the 5.9% rate given in September. Officials also revised their forecasts in next year, raising the growth rate in 2022 to 4% from 3.8% and reducing in 2023 to 2.2% from 2.5%.
The statement again notes that the development with Covid pandemic, especially with variations, pose a risk to the outlook.
Inflation hotter than expected
Both policy moves come in response to escalating inflation, which is at a 39-year high for consumer prices. Wholesale prices in November rose 9.6%, the fastest on record in a sign of deeper and broader inflationary pressures.
Fed officials have long emphasized that inflation is “transient,” which Powell has determined is unlikely to leave a lasting mark on the economy. He and other central bankers, as well as Finance Secretary Janet Yellen, have stressed that prices are exploding due to pandemic-related factors such as unusual demand outstripping supply but will eventually decrease.
However, the term became a disdain and the statement after the meeting dropped it. Powell announced the move during his congressional testimony last month, saying “it may be an appropriate time to take that back and try to better explain what we mean.”
For Fed Powell, the tightening now marks a significant turnaround from the policy enacted just over a year ago. Called “flexible average inflation,” which means it will be content with inflation slightly higher or lower than the long-held 2% target.
The practical application of this policy is that the Fed is willing to let inflation heat up a bit with the benefit of completely healing the labor market from the impact of the pandemic. The Fed’s new policy aims to seek full and inclusive employment across race, gender, and economic sectors. Officials have agreed not to raise interest rates in anticipation of rising inflation, as the central bank has done in the past.
However, as the “temporary” narrative set in and inflation began to appear stronger and more durable, the Fed had to rethink its intentions and direction.
Asset purchases tapered off in November, with a $10 billion reduction in Treasury purchases and $5 billion in mortgage-backed securities. That still leaves the purchase volume for the month at $70 billion and $35 billion, respectively.
However, the Fed’s $8.7 trillion balance sheet has grown by only $2 billion over the past four weeks, with treasury holdings up $52 billion and actual MBS down $23 billion. Over the past 12 months, treasury holdings have increased by $978 billion while MBS has grown by $567 billion.
Under the new terms of a program known as quantitative easing, the Fed will accelerate the reduction of its holdings until it is no longer added to its portfolio. That would bring QE to an end in the spring and allow the central bank to raise rates anytime after that. The Fed said it likely won’t raise rates and continue to buy bonds simultaneously, as the two moves will work with cross-purposes.
From there, the Fed can at any time begin to reduce its balance sheet by selling securities outright, or, in the more likely case, begin to allow the proceeds from its holdings to be released. Their current bond flows out monthly at a controlled rate.
Correction: The Fed’s $8.7 trillion balance sheet has grown by only $2 billion over the past four weeks, with treasury holdings up $52 billion and actual MBS down $23 billion. An earlier version misrepresented one of the figures.
