Next month, the U.S. Federal Reserve (Fed) will begin tapering its bond purchases. Moreover, the reduction would take place by July of next year, at a greater pace and scale than before. Experts interpreted the statement as announcing the possibility of a first rate hike by late next year.
The minutes of the Federal Open Market Committee (FOMC) meeting from the 21st to the 22nd of last month, released by the Fed on the 13th (local time), indicated that Fed members favor a rate cut and hike in the near future.
The Federal Reserve currently operates on a policy of zero interest rates. It has a target rate of 0-0.25% for the federal funds rate (FF), which is the prime rate. Additionally, it provides liquidity to the market by purchasing $120 billion of government bonds and mortgage-backed securities (MBS) each month.
Despite the strong economy and high inflation, FOMC members appeared to have shifted their focus away from raising rates this year to cutting rates in November. Nine of the 18 FOMC members, including Chairman Jerome Powell, predicted a rate hike by the end of next year.
Reduction in Treasury purchases.
The easing should begin with a reduction in monthly Treasury purchases of $10 billion and purchases of mortgage-backed securities of $5 billion.
“Participants generally felt that a gradual reduction would be appropriate if the general trend of economic recovery continued,” the minutes state.
“If the start of the gradual reduction is decided at the next meeting (FOMC on 2-3).. We decided that the reduction in the size of monthly purchases could begin in mid-November or mid-December”. After last month’s FOMC, U.S. inflation continued to rise sharply.
In particular, labor statistics confirmed that wage inflation is the main driving factor, making the Fed’s decision to taper highly likely at its next meeting.
The Consumer Price Index (CPI) for September, released by the U.S. Department of Labor on the 13th, when the minutes were released, also rose 5.4% from the same month a year ago. It exceeded by far the Fed’s inflation target of 2.0%.