Federal Reserve Chair Jerome Powell said officials can be patient on raising interest rates -- after announcing a start to reducing their bond purchases -- but won’t flinch from action if warranted by inflation.
“We think we can be patient. If a response is called for, we will not hesitate,” he told a news conference Wednesday after the Federal Open Market Committee said it would scale back by $15 billion a month starting in November.
Tapering “does not imply any direct signal regarding our interest rate policy,” Powell said, who noted that the pace put them on track to wrap the process up by mid-2022 but could speed up or slow down depending on the economic outlook.
The Fed will reduce Treasury purchases by $10 billion and mortgage-backed securities by $5 billion, marking the beginning of the end of the program aimed at shielding the economy from Covid-19. The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%. The decision was unanimous.
“We don’t think it is a good time to raise interest rates because we want to see the labor market heal further,” Powell said.
Fed Leans Into Supply Chain as Inflation Sticking Point: TOPLive
The Fed has been buying $80 billion of Treasuries and $40 billion of MBS every month to help stimulate economic activity that was crushed in the initial pandemic lockdown and subsequent uneven recovery.
Ten-year Treasury yields rose while the dollar slipped and the S&P 500 pushed higher.
Central banks in developed economies globally are shifting their attention to the risk of inflation as supply-chain logjams spur shortages amid strong demand. The Fed’s preferred inflation measure was 4.4% in the 12 months ending September, the highest in three decades and more than double the central bank’s target. Consumers’ expectations for prices climbed to 4.2% in the same month, the highest in records going back to 2013.
“Inflation is elevated, largely reflecting factors that are expected to be transitory,” officials said in the statement. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”
Powell told reporters that supply constraints have been larger and longer lasting than anticipated, but “like most forecasters we continue to believe that our dynamic economy will adjust to the supply and demand imbalances.”
Investors widely expected the announcement on asset purchases at this meeting as Fed officials including Powell had signaled the move.
Powell’s term expires in February. He declined to comment on the nomination process. President Joe Biden said Tuesday he would announce his choice for chair and other openings “fairly quickly.”
The pace of the taper clears the way for a possible interest-rate increase in the second half of 2022, with nine of 18 officials forecasting a move next year in their September outlook. Wednesday’s statement reiterated that rates will be held near zero until the economy achieves maximum employment.
Several measures of the labor market remain weaker than pre-pandemic levels, and policy makers are likely to intensify their debate over whether the period before Covid-19 hit offers the best benchmark for a workplace that has undergone tremendous change over the past two years.
Yields on 10-year U.S. Treasuries have declined over the past two weeks while rates on two-year notes have risen as traders price in expectations of a more aggressive, anti-inflationary tilt to Fed policy. Central bank officials have worked hard to distinguish tapering asset purchases from tightening.
“I don’t think we’re behind the curve. I feel policy is well positioned to address plausible outcomes,” Powell said.
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