Fed outlines plan to cut bond buying program in mid-November

The central bankers of USA pointed out that they could start to reduce the support they gave to the economy during the crisis in mid-November, but remain divided on the degree of threat posed by inflation and how quickly interest rates may have to rise, according to the minutes of their monetary policy meeting on September 21-22.

“No decision was made at the meeting on the moderation of asset purchases, but participants generally felt that, provided the economic recovery remains on the right track, a phase-down process that concludes in the middle of the year would be appropriate. next year ”, according to the minutes published this Wednesday.

Policy makers debated reducing Treasury purchases by $ 10 billion a month and mortgage-backed securities by $ 5 billion a month, according to the minutes, but “several” preferred faster cuts .

If the decision to start reducing purchases takes place at the monetary policy meeting on November 2-3, according to the minutes, the process could begin in the middle of the month or in the middle of December.

The president of the Fed, Jerome Powell, and his colleagues want to start cutting the $ 120 billion in monthly asset purchases the central bank has been making to spur economic recovery.

Focus on interest rates

With the imminent reduction in asset purchases, the focus is now on the timing of future interest rate hikes.

The Fed has promised to keep its benchmark interest rate for overnight loans at the current near zero level until the economy reaches full employment, and inflation has not only reached its 2% target, but is on track. stay modestly above for a while.

The central bank set these parameters when inflation had been below 2% for years and the great challenge was seen as raising it rather than slowing it down.

The opposite problem may now arise, however, as pent-up consumer demand fuels spending in an economy that is reopening and businesses, hit by supply bottlenecks, struggle to keep up.

In the forecasts published alongside the September monetary policy statement, half of the Fed’s monetary policy makers considered that a rate hike would be necessary before the end of next year, and all but one anticipated the first before the end from 2023.

The key for investors – and for the millions of Americans still unable to find work – is whether policymakers will have to start raising rates earlier to prevent inflation from spiking, potentially sacrificing labor market gains.

Powell has downplayed the possibility of being forced into that awkward position, but the data may work against him.

Consumer prices rose at a year-on-year rate of 5.4% in September, the US government reported on Wednesday, and interest rate futures traders raised their bets that the Fed will have to start raising them by next September.

In the minutes, “several” officials said economic conditions would likely justify keeping rates near their current level for “the next couple of years.”

However, “several” considered that rates would have to rise at the end of next year because full employment would be reached.