Fed announces reduction in bond purchases and insists inflation is “transitory”

The Federal Reserve (Fed) announced that it will start cutting its monthly bond purchases in November with plans to finish them in 2022, but maintained its view that high inflation will be “transitory” and probably will not require a rapid rise in interest rates.

However, the central bank noted that global supply difficulties were adding to inflation risks, saying that those factors “are expected to be transitory” but would have to decrease for the expected drop in prices to occur. .

“In light of the substantial further advance in the economy,” the US central bank said it would begin cutting its bond purchases, as widely expected, marking a formal policy change launched in March 2020 to fight the strong recession and mass layoffs caused by the COVID-19 pandemic.

Yet even announcing a $ 15 billion monthly cut in its monthly purchases of Treasuries and mortgage-backed securities, it did little to signal when the “normalization” phase of monetary policy could begin by raising interest rates. .

“Economic activity and employment have continued to strengthen,” announced the Federal Open Market Committee at the end of its last two-day meeting, but did not change its intention to leave interest rates near zero until inflation has reached the 2% and is “on track to moderately exceed 2% for some time.”

Overall, the Fed said it continued to believe that recent high inflation would decline, but the small wording change indicated that Fed officials see the process taking longer.

Inflation by the Fed’s preferred measure, the personal consumption expenditure price index, has hit twice the target rate since May, but officials are reluctant to change their outlook on monetary policy until it is clear that the The pace of price increases will not slow down by itself.