Fed could begin tapering asset purchases in November

The Federal Reserve opted to keep its target Fed funds rate at the current 0% to 0.25% range at its September 2021 meeting, while stating that it’s moving closer to tapering asset purchases.

In a prepared statement, the Federal Open Market Committee, the Fed’s rate-setting body, noted the economy is moving closer to the Fed’s goal for maximum employment and price stability, with inflation on track to be higher than 2% for a while. The path of the economy still depends on how the coronavirus progresses, however, and improvement on the vaccination front would help.

With improvement in vaccinations so far, the economy has continued to grow stronger. That’s why the Fed is contemplating the start of a slowdown of its monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage-backed securities. Those purchases will continue to be monitored.

Tapering impact could flow down to credit card rates

The asset purchases helped smooth the flow of credit through the economy during the pandemic, likely helping ease credit card rates as well. Variable credit card rates are tied to the Fed’s target interest rate, so a tightening of the Fed’s monetary policy, starting with its tapering of asset purchases, could impact card rates. Credit cardholders should take advantage of the current low rates.

In a related media conference, Fed Chair Jerome Powell noted that while the Fed’s asset purchases had helped “foster accommodative financial conditions,” the economy has made progress and the purchases are less useful now. If this progress continues, he said, “moderation is warranted.” The tapering could begin as early as the Fed’s next meeting in November, and the Fed is watching the September employment report.

It wouldn’t take a “knockout strong” employment report for September for the Fed to meet its employment goal and begin the tapering, but it would have to be a “decent” one, Powell said. While the “substantial progress test for employment is all but met,” he said, the Fed will look at the “broader environment” in deciding whether to taper.

The slowdown of asset purchases could continue until mid-2022. The Fed is still a long way from beginning to actually increase its target funds rate.

Fed’s economic projections slow down

It seems Federal Reserve members have cut back on their economic growth expectations, based on the economic projections released by the Fed after the FOMC meeting. Their median expectation for economic growth for the year is at 5.9%, down from a forecast of 7% in June. For 2022, they see a higher level of economic output, at 3.8%, compared to 3.3% in June.

As for the target Fed funds rate, at the median, they anticipate it will be at 0.3% in 2022 – which means the Fed could start lifting off its target interest rate next year. For 2023, they see this measure at 1%. Only one Fed member doesn’t see a liftoff by 2023.

On the unemployment front, they expect this measure to be at 4.8% by year end, up from June’s median 4.5% projection. For 2022, their unemployment expectations remained steady at 3.8%. However, their inflation expectations had risen to 4.2% for 2021, from June’s projected 3.4%. For 2022, they see inflation at 2.2%, up from June’s 2.1%.

Inflation could surprise

According to Powell, “bottlenecks” in the supply chain and difficulties in hiring could pose an upside risk to inflation. But Fed members’ expectations for a 2.2% inflation rate in 2022 only represents a “modest overshoot” and one that consumers will likely not notice.

The New York Fed reports that households anticipate higher inflation in the near term, but not in the long term, Powell noted. However, the Fed is “watching carefully” and would react, he said, “if we did see inflation moving up in a troubling way.”

Employment is in a unique situation. While there are job openings aplenty, it’s difficult to hire. School re-openings and the end of unemployment benefits are anticipated to help ease the labor market situation in the fall, but the Delta variant of COVID could have an impact.

Unemployment rate disparities between various ethnic groups continues, but the Fed will continue to look at the broader overall unemployment rate in framing its policies. The Fed’s tools are famously blunt and fiscal policy is better at targeting such inequity, Powell observed.

Fed working on central bank digital currency

And the Fed continues to work on the development of a central bank digital currency to ensure economic stability. It’s looking into technology and public policy issues before making a decision on this. Though the case for a central bank digital currency is “quite compelling.” Powell said, “it is more important to do this right than to do it fast.” The Fed also has to be in concert with the Biden administration and Congress on this matter.