Fed may start to tighten monetary policy in mid-November

The Fed may start scaling back its economic stimulus in mid-November

This is the content stated in the minutes of the September policy meeting of the US Federal Reserve (Fed).

Fed headquarters in Washington, DC Photo: AFP

Minutes from the Fed’s policy meeting released on Tuesday showed that Fed officials see the agency as close to meeting its economic goals and may soon begin to normalize policy by collecting more money. Narrow the size of the monthly asset purchase program.

Accordingly, the Fed will gradually reduce the size of the program to buy $ 120 billion worth of Treasuries every month. Minutes of the meeting stated that the Fed will likely start cutting $10 billion a month in monthly Treasury purchases and $5 billion in mortgage-backed securities (MBS).

The Fed is now buying at least $80 billion in Treasuries and $40 billion in mortgage-backed securities. Under previous plans, the agency had expected to end its $120 billion-a-month asset purchase program by mid-2022, if there were no disruptions or hiccups.

“Members of the meeting considered that if the US economic recovery momentum remains on track, it is reasonable to gradually reduce the economic stimulus package ending in the middle of next year,” the minutes of the Fed said. . They argue that if the decision to scale back program purchases to assets is made at the next policy meeting, the downsizing process will kick off in mid-November or mid-December.

The Fed is scheduled to hold its next policy meeting on November 2-3.

Kathy Jones, head of revenue strategy at Charles Schwab Financial Services, wondered, “If the Fed has announced it will be phasing out its asset purchases in November, I don’t see why they should. wait”, while some members wanted to cut asset purchases at a faster pace.

For example, the president of the Fed in St. Louis, James Bullard said that the reduction of the program to buy assets needs to be more drastic in the event that the Fed raises interest rates next year to cope with prolonged inflation.

At its September policy meeting, the Federal Open Market Committee (FOMC) of the Fed voted unanimously to anchor the short-term prime lending rate at the threshold of 0 – 0.25%. The committee also released a summary of the US economic outlook, including projections for GDP growth, inflation, and unemployment.

Fed officials revised down their US GDP forecast for 2021, but raised the inflation outlook. At the same time, they forecast the US unemployment rate will be lower than the previous forecast.

In the “dot chart” of the interest rate outlook, members of the US Federal Open Market Committee said they could start raising interest rates as soon as 2022. However, some members are concerned that the pressure is on Inflation is likely to last longer than they expect now, while traders expect the Fed to raise rates twice in 2022.

“Most of the meeting participants recognized that inflation risks are increasing because of the discontinuity supply and labor shortages are likely to last longer and may have larger or more persistent effects on prices and wages than they currently perceive,” the Fed minutes said.

Most Fed officials still maintain that the price increase is temporary, and that supply chain bottlenecks and other factors are likely to be gradually overcome.

However, inflationary pressures continued to increase as data released on October 13 showed that the consumer price index in the US increased fastest in decades with an increase of 5.4% in the past year.