The Federal Reserve said it could slow bond purchases and might raise interest rates in 2022.
Federal Reserve Policymakers Preparing to Pivot Away from Full-Scale Monetary Help Next Year
At the September 22 meeting of the Federal Reserve, policymakers indicated they will “soon” slow bond purchases AND may raise interest rates next year.
The statement released by the Federal Open Market Committee was, “If progress (in the business environment) continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
This new phrasing used by the Fed is very different from wording such as “over the coming months.” This new phrasing signals that a formal announcement regarding this “slowdown” or “moderation in the pace of (shifts)…” could come as early as the Fed’s next formal meeting in November.
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Fed Navigating Between Preventing Financial Overheating while Keeping Pandemic Recovery on Track
The US Congress has essentially tasked the Fed with two jobs: fostering price stability and fostering maximum employment. At the onslaught of the COVID pandemic in March 2020, the Fed enacted rock-bottom interest rates and began buying $120B in government-backed bonds every month in order to keep many types of borrowing cheap. Lending and spending are accessible now under tight guidelines and economic growth is both better and faster than expected.
But, problems remain. The COVID virus persists and too many adults remain unvaccinated. The job market is still missing millions of jobs despite unemployment figures trending downward. Partisan wrangling over spending plans and a needed debt ceiling increase may destabilize a full return to “normal.”
Fed’s Posture on Future Interest Rates
Whatever shifts the Fed makes to bond purchases and interest rates in the coming months will be extremely g-r-a-d-u-a-l.
Essentially, Fed officials want to avoid raising rates to cool off the economy before the labor market has fully healed. That, of course, is difficult to know how to do simply because our economy hasn’t ever recovered from pandemic-stimulated lockdowns before.
Likely, slowing bond purchases will be the Fed’s first step toward a back-to-normal policy setting. Fed officials appear to expect that its overall bond-buying program may end around the middle of 2022. Please remember that Fed officials would “prefer” to not lift interest rates before bond buying stops.
Half of the Fed’s policymakers appear to expect one or more interest rate increases by late 2022. By the end of 2024, the first time the Fed has released 2024 projections, policymakers are expecting rates to stand at 1.8%.
Bottom line…according to Priya Misra, global head of rates strategy with TD Securities, the Fed is “…putting the markets on notice…” that shifts in economic policy are coming.
Thanks to The New York Times.