Fed announces tapering of bond-buying program amid economic recovery

Nov 04 , 2021. 5 hours ago – 04:47 KYODO NEWS

WASHINGTON – The U.S. Federal Reserve said Wednesday it has decided to scale back a massive bond-buying program amid the economic recovery from the coronavirus pandemic, a major shift toward normalization of monetary policy.

After a two-day meeting of the policy-setting Federal Open Market Committee, the central bank said it will begin reducing monthly purchases in Treasuries and mortgage securities by $15 billion, while maintaining its target range for the federal funds rate at 0 to 0.25 percent, as widely expected.

On growing inflation pressure in the United States, the central bank strengthened its warning slightly from the previous policy meeting in September, saying, “Inflation is elevated, largely reflecting 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,” it added.

Overall, however, the bank appeared bullish on the economic outlook, saying economic activity and employment have continued to strengthen on progress toward mass vaccination and strong policy support.

U.S. Federal Reserve Chairman Jerome Powell speaks at an online press conference on Nov. 3, 2021. (Kyodo)

With reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities, the Fed said it will buy a total of $105 billion in these bond assets later this month, compared with $120 billion up to the previous month.

If the central bank continues to reduce the purchases by the same amount each month, the program would come to an end in mid-2022.

In its reasoning for scaling back the asset-purchasing program, the central bank cited “the substantial further progress the economy has made” since last December toward its goal of achieving maximum employment and long-term inflation at the rate of 2 percent.

The Fed also signaled it will hold its key interest rate steady for a while until the labor market and inflation rate reach the bank’s target levels.

A summary of economic projections released in September showed that half of the 18 Fed policymakers were anticipating rate hikes in 2022.

But as the Fed has now moved to begin cutting back one of its quantitative easing measures, the focus of financial markets will likely be on the timing of the first rate hike, with speculation already emerging that the central bank may tighten its credit grip sooner than previously thought in line with rising inflation.

Expectations for an earlier interest-rate hike by the Fed in financial markets could trigger an outflow of funds from emerging-economy markets and result in the hampering of global economic growth.

The bank indicated after its September meeting that a decision would be nearing on beginning to taper the bond-buying program. The quantitative easing measure was introduced along with the near-zero interest rate policy in March 2020 as the pandemic intensified in the United States.

The Fed said it “will continue to monitor the implications of incoming information for the economic outlook” and “be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals.”