New Reporter
23-09-21, 10:40
Fed Tees Up Taper and Signals Rate Rises Possible Next Year
Central bank officials prepare to reverse pandemic stimulus programs as soon as November; new projections showed half of 18 officials expect to raise interest rates by the end of 2022
By Nick Timiraos
Sept. 22, 2021
The Federal Reserve signaled it was ready to start reversing its pandemic stimulus programs in November and could raise interest rates next year amid risks of a lengthier-than-anticipated jump in inflation.
The Fed’s rate-setting committee, at the end of a two-day gathering, indicated in its postmeeting statement Wednesday that it could start to reduce, or taper, its $120 billion in monthly asset purchases as soon as its next scheduled meeting, Nov. 2-3.
“The purpose of that language is to put notice out that that could come as soon as the next meeting,” Fed Chairman Jerome Powell said at a press conference.
Mr. Powell said officials hadn’t made a formal decision on how quickly to reduce purchases, but most agreed that a gradual process “that concludes around the middle of next year is likely to be appropriate.”
Major U.S. indexes soared to intraday highs following the central bank’s statement, with the Dow Jones Industrial Average adding as much as 520.58 points at its peak. The blue-chip index was up 338.48 points, or 1%, at the close of trading. In the bond market, the yield on the 10-year Treasury note ticked up to 1.332%, from 1.323% on Tuesday.
New projections released at the end of the Fed’s two-day policy meeting showed half of 18 officials expect to raise interest rates by the end of 2022. In June, just seven officials anticipated that, with most instead penciling in rate increases in 2023.
The projections showed several officials expected somewhat higher inflation next year than they had in June and nearly all penciled in more rate increases in 2023.
“I came away thinking Federal Reserve officials are somewhat more concerned about elevated risks of inflation and they see the possibility that inflation could be a little more persistent,” said Tiffany Wilding, economist at Pacific Investment Management Co. “You saw a very consistent view across the committee that, ‘We really need to manage inflation risk, and therefore we may need to hike sooner than expected.’”
Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December has produced a recovery like none in recent memory. Inflation has soared this year, with so-called core prices that exclude volatile food and energy categories up 3.6% in July from a year earlier, using the Fed’s preferred gauge. The gains largely reflect disrupted supply chains, shortages and a rebound in travel associated with the reopening of the economy.
A recent surge in coronavirus cases related to the more transmissible Delta variant has further clouded the outlook in recent months by potentially intensifying the challenges of slower growth and higher inflation.
The Fed cut its short-term benchmark rate to near zero when the coronavirus pandemic hit the U.S. economy in March 2020, and it has been purchasing at least $80 billion a month in Treasury and $40 billion a month in mortgage bonds since June 2020 to provide additional stimulus.
To conclude those purchases by the middle of next year, officials could pare those holdings by $10 billion and $5 billion a month, respectively, if they begin the process next month. That would be a somewhat faster timetable—around eight months—than during a previous taper experience that was announced in late 2013 and lasted over 10 months in 2014.
“I think this will be a shorter period,” Mr. Powell said. “The economy’s much farther along than it was when we tapered in 2013.”
Fed officials laid out a three-part test to raise interest rates one year ago that would require inflation to reach 2% and be on course to exceed that while the labor market returns to levels consistent with maximum employment.
In December, officials said they would buy bonds at the current pace until the economy had made “substantial further progress” toward their goals of reversing a shortfall then of around 10 million jobs since the start of the pandemic and moving inflation back to their 2% goal over time. The Fed’s asset portfolio has doubled to $8.4 trillion from $4.2 trillion in February 2020.
Mr. Powell had already indicated last month that most officials thought they had met their inflation progress test for tapering asset purchases, leaving the employment shortfall as the remaining hurdle. The economy has added around 4.7 million jobs this year through August—closing not quite half of the shortfall that existed in December—and the unemployment rate has fallen to 5.2% in August from 6.7% in December. Officials will see one more monthly employment report before their next meeting.
For the labor-market goal, “I guess my own view would be that the test…is all but met,” said Mr. Powell, reinforcing the prospect that a taper would likely begin in November.
One wild card is whether Congress will have resolved a standoff over raising the federal borrowing limit by then. Mr. Powell, speaking more broadly, said a taper would be feasible in November if “the overall situation is appropriate for this.”
Mr. Powell has dismissed talk about rate increases by describing the thresholds for raising rates as more stringent than those to reduce bond purchases. But getting that message to stick could be tricky because new interest-rate projections—the so-called dot-plot—show officials are eyeing more interest-rate increases.
In June, the dot-plot surprised investors by showing most of the officials expected to raise interest rates by at least a half-percentage point in 2023. Their March projections showed most didn’t see any increases through 2023.
The projections released Wednesday show that half of the officials expected interest rates would need to rise at least 1 percentage point from their current level by the end of 2023, and by another three-quarters of a percentage point in 2024.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said it was reasonable to expect officials to want to conclude their bond taper by the middle of next year so that they would have greater flexibility to raise rates sooner if inflation appears to defy earlier expectations that it will return more quickly to the Fed’s 2% goal.
“The main catalyst is the fact that inflation has accelerated faster than they previously forecast and is remaining elevated,” she said.
Officials expect slower growth, higher inflation and higher unemployment this year than they did in June, the projections showed, underscoring the effects of the Delta variant of the coronavirus.
For example, Fed officials over the summer had said they expected more Americans to rejoin the workforce as children return to in-person school, unemployment benefits expire and concerns about the virus recede. The Delta variant has muddied that scenario, raising the prospect that continued supply chain disruptions and difficulty in competing for workers could lead to a longer period of shortages and rising prices.
“It may just be that it’s going to take more time,” said Mr. Powell. “These are people who were largely working in February of 2020. They’ll get back to work...It may just take a longer time.”
Central bank officials prepare to reverse pandemic stimulus programs as soon as November; new projections showed half of 18 officials expect to raise interest rates by the end of 2022
By Nick Timiraos
Sept. 22, 2021
The Federal Reserve signaled it was ready to start reversing its pandemic stimulus programs in November and could raise interest rates next year amid risks of a lengthier-than-anticipated jump in inflation.
The Fed’s rate-setting committee, at the end of a two-day gathering, indicated in its postmeeting statement Wednesday that it could start to reduce, or taper, its $120 billion in monthly asset purchases as soon as its next scheduled meeting, Nov. 2-3.
“The purpose of that language is to put notice out that that could come as soon as the next meeting,” Fed Chairman Jerome Powell said at a press conference.
Mr. Powell said officials hadn’t made a formal decision on how quickly to reduce purchases, but most agreed that a gradual process “that concludes around the middle of next year is likely to be appropriate.”
Major U.S. indexes soared to intraday highs following the central bank’s statement, with the Dow Jones Industrial Average adding as much as 520.58 points at its peak. The blue-chip index was up 338.48 points, or 1%, at the close of trading. In the bond market, the yield on the 10-year Treasury note ticked up to 1.332%, from 1.323% on Tuesday.
New projections released at the end of the Fed’s two-day policy meeting showed half of 18 officials expect to raise interest rates by the end of 2022. In June, just seven officials anticipated that, with most instead penciling in rate increases in 2023.
The projections showed several officials expected somewhat higher inflation next year than they had in June and nearly all penciled in more rate increases in 2023.
“I came away thinking Federal Reserve officials are somewhat more concerned about elevated risks of inflation and they see the possibility that inflation could be a little more persistent,” said Tiffany Wilding, economist at Pacific Investment Management Co. “You saw a very consistent view across the committee that, ‘We really need to manage inflation risk, and therefore we may need to hike sooner than expected.’”
Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December has produced a recovery like none in recent memory. Inflation has soared this year, with so-called core prices that exclude volatile food and energy categories up 3.6% in July from a year earlier, using the Fed’s preferred gauge. The gains largely reflect disrupted supply chains, shortages and a rebound in travel associated with the reopening of the economy.
A recent surge in coronavirus cases related to the more transmissible Delta variant has further clouded the outlook in recent months by potentially intensifying the challenges of slower growth and higher inflation.
The Fed cut its short-term benchmark rate to near zero when the coronavirus pandemic hit the U.S. economy in March 2020, and it has been purchasing at least $80 billion a month in Treasury and $40 billion a month in mortgage bonds since June 2020 to provide additional stimulus.
To conclude those purchases by the middle of next year, officials could pare those holdings by $10 billion and $5 billion a month, respectively, if they begin the process next month. That would be a somewhat faster timetable—around eight months—than during a previous taper experience that was announced in late 2013 and lasted over 10 months in 2014.
“I think this will be a shorter period,” Mr. Powell said. “The economy’s much farther along than it was when we tapered in 2013.”
Fed officials laid out a three-part test to raise interest rates one year ago that would require inflation to reach 2% and be on course to exceed that while the labor market returns to levels consistent with maximum employment.
In December, officials said they would buy bonds at the current pace until the economy had made “substantial further progress” toward their goals of reversing a shortfall then of around 10 million jobs since the start of the pandemic and moving inflation back to their 2% goal over time. The Fed’s asset portfolio has doubled to $8.4 trillion from $4.2 trillion in February 2020.
Mr. Powell had already indicated last month that most officials thought they had met their inflation progress test for tapering asset purchases, leaving the employment shortfall as the remaining hurdle. The economy has added around 4.7 million jobs this year through August—closing not quite half of the shortfall that existed in December—and the unemployment rate has fallen to 5.2% in August from 6.7% in December. Officials will see one more monthly employment report before their next meeting.
For the labor-market goal, “I guess my own view would be that the test…is all but met,” said Mr. Powell, reinforcing the prospect that a taper would likely begin in November.
One wild card is whether Congress will have resolved a standoff over raising the federal borrowing limit by then. Mr. Powell, speaking more broadly, said a taper would be feasible in November if “the overall situation is appropriate for this.”
Mr. Powell has dismissed talk about rate increases by describing the thresholds for raising rates as more stringent than those to reduce bond purchases. But getting that message to stick could be tricky because new interest-rate projections—the so-called dot-plot—show officials are eyeing more interest-rate increases.
In June, the dot-plot surprised investors by showing most of the officials expected to raise interest rates by at least a half-percentage point in 2023. Their March projections showed most didn’t see any increases through 2023.
The projections released Wednesday show that half of the officials expected interest rates would need to rise at least 1 percentage point from their current level by the end of 2023, and by another three-quarters of a percentage point in 2024.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said it was reasonable to expect officials to want to conclude their bond taper by the middle of next year so that they would have greater flexibility to raise rates sooner if inflation appears to defy earlier expectations that it will return more quickly to the Fed’s 2% goal.
“The main catalyst is the fact that inflation has accelerated faster than they previously forecast and is remaining elevated,” she said.
Officials expect slower growth, higher inflation and higher unemployment this year than they did in June, the projections showed, underscoring the effects of the Delta variant of the coronavirus.
For example, Fed officials over the summer had said they expected more Americans to rejoin the workforce as children return to in-person school, unemployment benefits expire and concerns about the virus recede. The Delta variant has muddied that scenario, raising the prospect that continued supply chain disruptions and difficulty in competing for workers could lead to a longer period of shortages and rising prices.
“It may just be that it’s going to take more time,” said Mr. Powell. “These are people who were largely working in February of 2020. They’ll get back to work...It may just take a longer time.”