Federal Reserve officials could start reducing the extraordinary support they have provided to the economy by mid-November, according to the minutes of the central bank’s September meeting released on Wednesday.
The meeting summary indicated that members feel the Fed is close to meeting its economic goals and could soon begin normalizing policy by reducing the pace of its monthly asset purchases.
In a process known as tapering, the Fed will slowly reduce its monthly purchases of $120 billion in bonds, with the minutes indicating that the central bank will likely begin cutting $10 billion per month in Treasuries and $5 billion per month in mortgage-backed securities.
The Federal Reserve currently buys at least $80 billion in Treasuries (bonds and bills), and $40 billion in mortgage-backed securities.
The target date for completion of the procurement process, in the absence of any material development, will be mid-2022.
The minutes noted that “participants generally assessed that, provided the economic recovery remains on track and at scale, the tapering off process that ends in the middle of next year is likely to be appropriate.”
“Participants noted that if a decision was made to begin tapering at the next meeting, the tapering process could begin with monthly purchasing calendars beginning either in mid-November or mid-December,” the summary said. The Federal Reserve then meets on November 2-3.
This comes amid strong expectations on the part of the financial markets, that the start of the tapering process will be in November.
“If they announce tapering in November, I don’t understand why they wait,” said Cathy Jones, chief fixed income strategist at Charles Schwab.
“They have to start,” she added, explaining that she was surprised by a note in the minutes that several members “prefer to move forward at a faster pace.”
Among the members is St. Louis Fed President James Bullard, who believes tapering must be more severe if the Fed needs to raise interest rates next year to combat constant inflation.
During the September Monetary Policy Committee meeting, the committee voted unanimously to keep the central bank’s short-term borrowing rate at zero to 0.25%.
The committee also issued a summary of its economic forecasts, including forecasts for GDP growth, inflation and unemployment. As members trimmed their GDP estimates for this year, they raised their inflation forecasts, and indicated that they expect unemployment to be lower than previous estimates.
The committee has indicated that it may begin raising interest rates as soon as 2022. However, markets have already released their pricing for the first rate hike next September, according to the CME FedWatch tool. After the minutes were released, traders increased the probability of a hike in September to 65% from 62%.
Despite this, officials stressed that the decision to scale back asset purchases should not be seen as raising pending interest rates.
However, some members at the meeting expressed concern that the current inflation pressures may last longer than they expected.
The minutes stated that “most participants view inflation risks as likely to the upside due to concerns that supply disruptions and labor shortages may last longer and may have greater or more lasting effects on prices and wages than they currently assume.”
Most Fed officials believe the current price increases are temporary, due to supply chain bottlenecks and other factors, and likely to subside.
However, inflation pressures persisted, with Wednesday’s reading showing that US consumer prices rose 5.4% over the past year, the fastest pace in decades.
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