Federal Reserve President Jerome Powell assured lawmakers on Wednesday that the US Central Bank’s move to speed up the withdrawal of support for the US economy should not disrupt the markets, a day after his comments caused a stupidity on Wall Street.
Powell told the Senate Banking Committee on Tuesday that the Fed could accelerate its plan to reduce its purchases of monthly bonds and mortgage-backed securities, triggering a 650-point drop in the Dow. The market recovered on Wednesday.
“At this point, the economy is very strong, and the inflationary pressures are high,” Powell said Tuesday. “So it is appropriate in my view to consider rolling out the taper of our property purchases that we actually announced at our November meeting, maybe a few months in advance.”
PED TO TAPER BOND Purchases $ 15BA within months of departure from epidemic-era policy
This means that the Fed’s bond-buying program expires sooner than expected, potentially leading to higher interest rates. The central bank buys $ 120 billion in bonds every month during a high pandemic to keep credit cheap and stabilize financial markets. In November, Fed officials announced plans to return the program to $ 15 billion a month, ending the program by the end of June.
While testifying before the House Financial Services Committee on Wednesday, Powell doubled down on his comments, telling lawmakers that it was “appropriate” for the Fed to consider speeding tapping at its December meeting as consumers deal with the explosion of inflation.
“The tapper markets don’t have to be a disruptive event. I don’t expect that to happen,” Powell said. “It’s not so far. We’ve telegraphed it.”
Goldman Sachs economists expect the Fed to double its bond purchases to $ 30 billion in January, keeping the central bank on track to close the program by mid-March.
“The increased openness to accelerate the taper pace somewhat reflects expected inflation over the past two months and reflects greater comfort among Fed officials. The rapid pace does not shock financial markets,” analysts wrote in a client note last week.
Minutes released last week from the US Central Bank’s November 2-3 meeting hinted that some policymakers are worried that inflationary pressure is worsening and that they are prepared to raise prices near zero if prices continue to rise. While officials have emphasized a “patient” approach to incoming economic data, they “should not hesitate to take appropriate measures to address inflationary pressures that could jeopardize its long-term price stability and employment objectives.”
“Various participants noted that if inflation continues to exceed the committee’s objectives, the committee must be prepared to adjust the pace of asset purchases ahead of current expected participants and increase the target range for the federal funds rate,” the minutes said. .
New data released Wednesday morning shows price index data on personal consumption expenditures – the Fed’s preferred inflation measure – rising 4.1% over the previous year in October, excluding more volatile measurements of food and energy, which have accelerated since January 1991.
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Policymakers end the tapping process, which is currently on pace to expire in June, before interest rates rise from near zero
But traders are currently pricing in at least three rate hikes next year, with the potential following the release of the latest inflation data.
Fed officials will release their latest economic projections at their next policy-setting meeting, which will take place Dec. 14-15.