Fed Outlines Plan To Taper Bond-Buying, No Movement On Rate Hikes

The Federal Reserve outlined a plan to begin tapering its emergency bond purchases. The purchases of $120 billion per month in Treasuries and mortgage-backed securities (MBS) were a government effort to keep financial markets afloat after the economic fall out from Covid-19.

The Federal Open Market Committee (FOMC) met for two days this week then released a statement saying the Fed will begin tapering those purchases later this month. It will reduce its purchases of Treasury securities from $80 billion to $70 billion and from $40 billion to $35 billion for mortgage-backed securities.

“In light of the substantial further progress the economy has made toward the Committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities,” the statement reads.

The Committee decided to keep the target range for the federal funds at 0 to ¼%. Without modification, the timeline puts the Fed on track to withdraw all stimulus by the middle of next year.

The announcement did not include rate increases.

“We didn’t have that discussion at today’s meeting,” Fed Chairman Jerome Powell said. “We did talk about the economy, and the development of the economy, but we didn’t ask ourselves whether the liftoff test is met, because [the test] is clearly not met on the maximum employment side.”

The Fed has said it will not raise interest rates from their historically low levels until employment rates improve and inflation has “risen to 2 percent” and is “on track to moderately exceed 2 percent for some time.”

Inflation is currently at an annual rate of 5.4%, a 30-year high. The Fed maintains that high inflation is a temporary problem, a view Powell stressed in the press conference after the FOMC meetings.

“Inflation is elevated, largely reflecting factors that are expected to be transitory,” he said. 

“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”

Former Treasury Secretary Lawrence Summers recently took to Twitter to criticize the Fed’s prediction that the current inflation level is temporary.

“Given lags in the indices, housing inflation is almost certain to soar in the coming months. With super-tight labor markets, rising strike activity, and real wages declining, increases in wage inflation are likely as well,” Summers wrote.

Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni voiced similar skepticism that inflation will normalize once material shortages and supply chain problems are resolved.

“Those things are going to be transitory once those supply chain issues go away. But I think the shelter price component is going to persist for a long time – like years.”