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The Fed: Fed slows down bond buying, says factors boosting inflation are expected to be transitory

The Federal Reserve on Wednesday announced it will begin to wind-down a bond-buying program designed to prop up the economy during the pandemic.

The Fed started buying trillions of dollars of bonds right when the pandemic struck in early 2020, eventually slowing the pace to $120 billion per month in June 2020. The central bank’s balance sheet has topped $8 trillion.

Last December, the Fed said it would continue to buy bonds until the economy had made “substantial” progress towards its goal of stable 2% inflation and a healthy labor market

In a statement Wednesday, the Fed said it would reduce the pace of purchases by $15 billion per month in November and December and said it judges that “similar reductions in the pace of net asset purchases will likely be appropriate each month.”

The central bank stressed tapering is not on a preset path. The FOMC “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

If the Fed proceeds at the pace set out, it would complete the bond-buying program in the middle of 2022. 

“Our decision today to begin tapering our asset purchases does not imply and direct signal regarding our interest rate policy,” Powell said.

Bond-buying lowers long-term interest rates and has been a signal to markets the Fed isn’t going to raise short-term interest rates

The eight-month tapering timeline gives the Fed time to see if inflation pressures subside.

In many ways, investors and economists are looking past the Fed’s taper.

The Fed’s biggest challenge is the surprising jump in inflation this year. Powell said he didn’t think the Fed was “behind the curve” on inflation.

Behind the curve means the Fed would have to tighten aggressively to bring down inflation.

In its policy statement, the Fed switched the language to say that inflation was elevated due to factors “that are expected” to be transitory.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the statement said.

Powell blamed supply constraints and bottlenecks for the higher inflation.

“Like most forecasters, we continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that as it does, inflation will decline to levels much closer to our 2% longer-run goal,” Powell said.

But he stressed the timing of that decline “is highly uncertain.” Higher inflation could last until next summer, he said later. As of yet, there are no “troubling increases in wages” to worry about, he added.

Read: Fed still thinks U.S. inflation is transitory but is hedging its bets

The Fed’s short-term rates are now near zero.

Bond markets are pricing in two quarter-point rate hikes in short-term interest rates in 2022.

Asked if the market was wrong in this prediction, Powell said the focus on Wednesdays meeting was tapering and not raising rates.

“It is time to taper. We don’t think its time yet to raise interest rates,” he said.

The time for lifting rates and removing accommodation will depend on the economy. We think we can be patient. If a response is called for, we will not hesitate,” he said.

One requirement for a rate hike – having the economy could return to full employment – could be met in the second half of next year, Powell said.

Stocks
DJIA,
+0.29%

SPX,
+0.65%

closed at record highs after the Fed decision as investors welcomed the central bank’s velvet touch.

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