Fed to begin slowing economic aid
Bond purchases to be reduced monthly
WASHINGTON — The Federal Reserve will begin dialing back the extraordinary economic aid it’s provided since the pandemic erupted last year, a response to high inflation that now looks likely to persist longer than it did just a few months ago.
In a statement Wednesday after its latest policy meeting, the Fed said it will start reducing its $120 billion in monthly bond purchases in the coming weeks, by $15 billion a month, though it reserved the right to change that pace. Those purchases have been intended to hold down long-term interest rates to spur borrowing and spending. With the economy recovering, that’s no longer needed.
The Fed’s announcement comes against a backdrop of surging prices — in food, rent, heating oil, autos and other necessities — that have imposed a burden on households and have become a political liability for the Biden administration and its Democratic allies in Congress.
The central bank will slow its $80 billion in Treasury purchases by $10 billion a month and its $40 billion in mortgage bonds by $5 billion in November and December and said similar reductions “will likely be appropriate” in the following months. That suggests that the central bank might decide to accelerate its pullback in bond buying if inflation worsens.
If the pace is maintained, the bond purchases would end altogether in June. At that point, the Fed could decide to raise its benchmark shortterm interest rate, which affects many consumer and business loans.
Market traders now expect at least two rate hikes during 2022, according to the Chicago Mercantile Exchange’s Fedwatch tool.
The changing expectations reflect a central bank that is rapidly shifting from an effort to boost the economy and encourage more hiring to one that is focused on rising inflation. Prices jumped in September from a year earlier at the fastest pace in three decades. The Fed now faces the delicate task of winding down its ultra-low-rate policies, which it hopes will slow inflation, without doing it so rapidly as to weaken the job market or cause another recession.
At a news conference Wednesday, Chair Jerome Powell stressed that the outlook for inflation looks highly uncertain, limiting the ability of the Fed to tailor its policies in response. He suggested inflation should slow sometime next year as supply bottlenecks ease but that the Fed cannot be certain that it will.
Powell suggested the Fed now feels less sure of whether the rise in inflation remains due mainly to short-term factors. An array of uncertainties that have complicated the inflation picture, he said, include how much COVID-19 may or may not hinder the economy in the coming months.
Last week, the government reported prices surged 4.4 percent in September from a year earlier — the fastest 12-month increase since 1991. While inflation is running hot, the job market isn’t back to full strength. The unemployment rate was 4.8 percent in September, above its pre-pandemic level of 3.5 percent. And roughly 5 million fewer people have jobs now than before the pandemic.
That puts Fed officials, particularly Powell, in a bind: They might want to keep their benchmark short-term interest rate at nearly zero, where it has been pegged since last March, to boost the economy and encourage more hiring. But they are facing growing pressure, including from Republican lawmakers in Congress, to rein in rising prices, which are offsetting much of the benefit that many Americans have enjoyed from recent wage increases.