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Fed to Cut Down on Pandemic Aid, Start Pulling Back Bond Purchases

UTC by Bhushan Akolkar · 3 min read
Fed to Cut Down on Pandemic Aid, Start Pulling Back Bond Purchases
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The Federal Reserve will start tapering its bond purchase program by the end of November. Fed Chairman acknowledged the rising inflation to be faster than expected but expects to pull back by mid-2022.

On Wednesday, November 3, the Federal Reserve (Fed) announced its intention to reduce the speed of its monthly bond purchases. This is for the first time when the US central bank has decided to start tapering on the pandemic aid.

In a post-meeting statement on Wednesday, Federal Open Market Committee said that it will start tapering bond purchases “later this month”. currently, the Fed is buying $120 billion worth of bonds every month. The tapering process will also see a reduction of $15 billion each month – $10 billion in Treasury and $5 billion in mortgage-backed securities.

The committee further noted that the move comes “in light of the substantial further progress the economy has made toward the Committee’s goals since last December”. Besides, Fed Chairman Jerome Powell also assured that the policy will remain accommodative until the central bank reaches its goals on inflation and employment. The Committee noted:

“The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook”.

This Move by Fed Is in Line with Market Expectations

It seems that the US central bank has communicated the move well. As a result, Wall Street hasn’t reacted abruptly. Rather, the US stock indices have been hitting record highs amid strong corporate earnings. However, the real test could be ahead as tapering will also mean rise in the interest rates. But this could probably occur this time in 2022. Speaking to CNBC, Charles Schwab head of fixed income Kathy Jones said:

“It’s certainly been communicated well, so I don’t think that should be a shock to anybody or cause a disruption to the market. The question really is more around asset prices than [interest] rates. We have very high valuations across the board in asset prices. What does this shift away from very easy money do to asset prices?”

Fed’s Take on Inflation

Along with this tapering move, the Fed has slightly altered its views on inflation. It acknowledged that the price increase has been faster than expected by the central bank. The statement from the Committee reads:

“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.”

Fed Chairman Jerome Powell said that as the supply issues continue, he expects the inflation to keep rising and will pull back around the middle of 2022.

“Our baseline expectation is that supply chain bottlenecks and shortages will persist well into next year and elevated inflation as well. As the pandemic supplies, supply chain bottlenecks will abate and growth will move up and as that happens inflation will decline from today’s elevated levels,” the Fed chairman noted.

Bonds, Business News, Market News, News
Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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