Nov 3, 2021 - Economy

Fed chair lays out taper timeline, says rate liftoff not discussed at FOMC meeting

Federal Reserve chairman Jerome Powell

Federal Reserve chair Jerome Powell. Photo: Kevin Dietsch/Getty Images

The Federal Open Market Committee on Wednesday laid out a framework for reducing — or tapering — the emergency bond purchases it's been making since March 2020.

Why it matters: These purchases, totaling $120 billion per month, were a keystone in the federal government's rescue of financial markets, which went into free fall soon after countries around the world instituted widespread stay-at-home orders.

  • More recently, as the U.S. economic recovery has picked up steam, critics have called on the Fed to pull back on the support to keep the economy from overheating and keep inflation in check.

The big picture: As expected, the Fed is keeping the federal funds rate at zero for now.

  • Fed chair Jerome Powell stressed at the press conference that he's not even thinking about a rate liftoff yet.
  • "We didn't have that discussion at today's meeting," he said. "We did talk about the economy, and the development of the economy, but we didn't ask ourselves whether the liftoff test is met, because [the test] is clearly not met on the maximum employment side."

But inflation is higher than Powell had expected. "Bottlenecks have been more persistent and more prevalent. We see that just like everybody else does, and we see that they're now on track to persist well into next year," he said.

  • Acknowledging that higher prices hit those living paycheck-to-paycheck hardest, Powell said the Fed will "will use our tools over time to make sure [inflation] doesn't become a permanent feature of life."
  • The Fed's view on inflation is that it still largely reflects factors that “are expected to be” transitory.

State of play: On the tapering front, the Fed said that it will begin to pare back its bond purchases this month.

  • Currently, it's buying $80 billion in Treasury bonds and $40 billion in mortgage-backed securities every month — and it will reduce those purchases to $70 billion and $35 billion, respectively.
  • The Fed will cut purchases further in December, to $60 billion in Treasuries and $30 billion in mortgage securities.
  • The Fed aims to continue reducing its purchases by a total of $15 billion per month after that, though it is prepared to adjust that if needed.

Markets reacted positively to the news, "which highlights how well the Fed telegraphed the decision to taper," commented Cliff Hodge, CIO for Cornerstone Wealth, in a note.

What's next: Before making a move on raising rates, Powell wants to see how the labor market progresses outside the context of the Delta variant, which arrested the pace of jobs growth during the late summer and early fall.

  • The October employment report, which will shed some light on this, is due out Friday morning.

Editor's note: This story has been updated throughout and corrected to reflect that all dollar amounts are in the billions.

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