WASHINGTON, Nov 3 -- Federal Reserve plans to end its bond purchases by mid-2022 as policymakers shift their focus to what if anything to do with a surge in inflation that is longer than anticipated.
The Federal Open Market Committee, the U.S. central bankers, in the minutes of their Sept. 21 - 22 meeting, said a taper of $120 billion of monthly asset purchases would be approved at this week's gathering of the Federal Open Market Committee.
What the minutes described as an illustrative Tapering Path would reduce purchases by 15 billion dollars per month, starting in November or December, a pace and starting point that would end the program by June or July.
The Fed changes other parts of its policy statement which are largely reflecting transitory factors, as well as other parts of its description of inflation. Fed officials still hold that view. By some time in 2022 they anticipate that global supply bottlenecks will have eased, pandemic-fueled demand for goods among U.S. consumers will cool after massive spending on cars, motorcycles and appliances, and enough people will be pushing to return to jobs that the pace of wage and benefit increases will also subside.
Fed officials have said the risks to that outlook in the past few weeks. The rise in inflation this year has already lasted longer than anticipated, and rising rents, low business inventories, and large numbers of workers still waiting on the sidelines may mean the high pace of price increases will continue for now.
The U.S. central bank is looking at a dilemma if inflation eases before policymakers are forced to step in with interest rate increases to curb it. The Fed's patience will run out soon, according to investors.
The Fed cut its overnight benchmark federal funds interest rate to near-zero level last year in order to stem the economic fallout of the Pandemic. There would be a three quarter-percentage point rate increase in 2022, although Fed officials were split over whether there would be one.
Should the transitory description of inflation be held by the inflation rate? My best guess is that they will keep their commitment to support the economic recovery until the economy is closer to full employment, according to Aneta Markowska, an economist at Jefferies. If they were intellectually honest, the Fed would probably drop it if they were intellectually honest, but given what happens in the market, the Fed has to tread carefully. She said that push back to expectations, emphasizing the 5 million jobs still missing before the pandemic, and could unhinge the market outlook for inflation. It could push inflation risks even higher and slow the recovery if it is too hard on inflation risks, as well as it could push rate increase expectations even higher.
The Fed is due to release its policy statement at 2 p.m. EDT 1800 GMT It will not issue new economic forecasts, so beyond the statement it will be up to Fed Chair Jerome Powell in his news conference half an hour later to strike a balance between the two sides of the central bank's mandated goals of achieving maximum employment and stable prices.
This will be a critical communications moment for Powell, whose term as Fed chief ends in February 2022. The White House has not yet yet announced whether the former investment banker will be reappointed to a second term.
The central bank's new strategic approach to allow more risks with higher inflation in order to push job growth as high as possible was developed by Powell's bias in favor of the job market.
The Fed says it will not raise rates until inflation is not rising to its 2% target, but is on track to increase it for some time, so that the 2% level is maintained on average following the years in which it ran low.
How much or long an overshoot of the inflation is intended is not known in the phrase. The averages are creeping higher already while Fed policymakers have generally described the inflation benchmark as still a ways off, while the Fed policymakers have generally described the improvement of the inflation benchmark.
The rebound on the labor market has taken a different course than Fed officials expected. Despite near- record numbers of job openings, labor force participation is improving slowly, with workers by choice or family necessity taking more time to return to jobs, and using savings elevated by pandemic benefit payments to cover bills in the meantime.
There is a small percentage point below where the employment-to population ratio was at the outset of the pandemic in February 2020, less than half of the ground needed to return to the previous level.
The central bank says the Fed will make a statement on Wednesday over the taper of the Fed purchases of U.S. Treasuries and mortgage-backed securities.
In the debate, the job market can improve, how quick it can be done, and why COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.
If the Fed projects that inflation will not revert to target within a reasonable amount of time, then the Fed could step up the tightening schedule even if employment is short of the mandate, Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote ahead of the policy decision. In practice, the Fed is waiting for more inflation data to see if the transitory narrative holds.