Fed to stop buying in mid-2022 but rate hike is far away

The Federal Reserve does not surprise the markets, even if it says it is “ready” to review all decisions and use “all the tools” at its disposal. In the November meeting, however, the Federal Reserve’s Monetary Policy Committee – “in the light of the substantial further progress made by the American economy” – initiated the so-called ‘tapering’, or the process of reducing purchases, but also decided to keep rates steady in the range between 0 and 0.25%. From the current $ 120 billion a month, the Fed will cut 15 billion in mid-November, with purchases of Treasury securities falling from 80 billion to 70 billion monthly, while interventions in the asset backed securities markets will go from 40 to 35. But by mid-December the Fed has already planned a further cut of 15 billion, with purchases of securities falling to 60 billion while the ABS to 30 billion. The Committee – which approved the decisions unanimously – “believes that similar reductions will probably be appropriate each month, but is ready to adjust the pace of purchases if justified by changes in the economic outlook”. And as Fed Chairman Jerome Powell explained in a press conference “if the economy were to evolve as expected” by adopting a cut of $ 15 billion a month, central bank interventions “will cease by the middle of next year”. In the meantime, “the purchases and availability of securities in progress by the Federal Reserve – underlines by Washington – will continue to favor the regular functioning of the market and accommodating financial conditions, thus supporting the flow of credit to households and businesses”. The US economy is recovering, as evidenced by “the indicators of economic activity and employment which continue to strengthen”, even if – explains the Fed – for the sectors most affected by the pandemic, after the progress of recent months, ” the summer increase in COVID-19 cases has slowed the recovery “. Powell – who did not want to answer questions about his possible reconfirmation – however explained that if after the + 6.5% achieved by the US economy in the first 6 months and after “in the third quarter there was a significant slowdown “linked to the increase in coronavirus cases for the delta variant and supply bottlenecks,” given the decline in cases, growth should recover in this quarter leading to strong growth for the year as a whole “. The Fed stressed that in recent months there has been a “high” level for inflation but “largely reflects factors that should be transitory”. In fact, it is recalled, “the imbalances in supply and demand linked to the pandemic and the reopening of the economy have contributed to considerable price increases in some sectors”. For the future, explains the Fed, “the trend of the economy continues to depend on the course of the virus “. “Advances in vaccinations and easing supply constraints are expected to support continued progress in activity and employment, as well as a reduction in inflation” but “risks to the economic outlook remain”. Powell acknowledged that “if you look at the progress we have made over the past year, and if this pace continues, I think it is possible” that the US economy will reach maximum employment in mid-2022 (thus satisfying one of the conditions defined for the rise in interest rates). The Fed chairman, however, underlined the “transparency” of the central bank, also with regard to interventions on purchases: “We do not want to surprise the markets”.