Federal Reserve set to reverse massive stimulus measures

If the economic recovery continues to progress as expected, the Fed “believes that a moderation in the pace of asset purchases may soon be justified”, according to the bank’s policy update released on Wednesday.

This raises the prospect of an announcement in November that it will hold back. But even if such a decision were delayed until December or January, it wouldn’t matter much to the markets, which have already incorporated a policy change, said Seema Shah, chief strategist at Principal Global Investors, in comments sent by email.

The Fed could also raise interest rates as early as next year, according to updated projections, instead of waiting until 2023 as previously forecast.

When the pandemic began to wreak havoc on the U.S. economy in early 2020, the Fed stepped in, cutting interest rates close to zero and pledging to buy $ 120 billion worth of treasury securities and mortgage backed each month. These purchases will soon be canceled, it seems, in what is called a “cone”.

It is the Fed’s job to keep prices stable and to achieve as many jobs as possible. In recent months, Powell had said more progress was needed on those fronts until a change in policy was warranted. But now his tone has changed: While the inflation test is already full, the job test is “almost full,” Powell told reporters at Wednesday’s press conference.

“For me, it shouldn’t be a great knockout [September] jobs report, ”Powell added, although other members of the political committee were still hoping for further improvements.

Investors have long expected the Fed to cut its monthly stimulus measures as the recovery unfolds well over the summer. But a disappointing jobs report in August pushed back those expectations. Wednesday’s announcement was therefore in line with what investors expected and the stock market continued its rally after its publication.

Roadblocks to come

There are still some hurdles that the economy and the market must overcome.

In Washington, the debt ceiling debate intensifies as lawmakers try to find a way to keep the government from running out of cash.

“It is just very important that the debt ceiling be raised so that the United States can pay its bills as they fall due,” said Powell, adding that the damage to the economy and financial markets would be severe if there were any. fault. No one should assume that the Fed could fully protect the economy from such a failure, he added.

Meanwhile, the recovery has run into some headwinds recently as the Delta variant leads to more infections and affects people’s willingness to be with others.

And as many economists have started to factor in the Delta effect into their winter forecasts for the economy, the Fed has, too. His projections predict weaker economic growth for 2021 with gross domestic product up 5.9%, compared to the 7% he forecast in June. However, the growth rate for 2022 has been revised upwards to 3.8% from 3.3%.

Likewise, the Fed now expects unemployment to be slightly higher – at 4.8% – than previously thought at the end of this year. Likewise, inflation is also likely to be higher by the end of the year than expected in June, as it takes longer for the bottlenecks and shortages that drive prices up to subside. The personal consumption expenditure index, which is the Fed’s preferred measure of inflation, is expected to stand at 4.2% for the year instead of the previously forecast 3.4%.

Spikes in inflation over the summer fueled market sentiment that the Fed would soon rule its easy money policies as soon as possible to keep the economy from overheating.


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