Fed to slow economic aid amid rise in inflation fears

Bond buys meant to hold down long-term interest rates and spur borrowing

WASHINGTON — The Federal Reserve will begin dialing back the 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 across the economy 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 short-term interest rate, which affects many consumer and business loans. That would be much earlier than Fed officials had envisioned last summer, when they collectively forecast that the first rate hike wouldn’t happen until late 2023.

According to the Chicago Mercantile Exchange’s FedWatch tool, market traders now expect at least two rate hikes during 2022.

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 even 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 that inflation should slow next year as supply bottlenecks ease but that the Fed cannot be certain that it will.

In its statement, the Fed slightly altered its long-standing language on inflation to acknowledge the risk that high prices could prove longer-lasting. Previously, it had said inflation was “elevated, largely reflecting transitory factors,” notably supply shortages as the economy has swiftly recovered from the pandemic recession. Now, it says, elevated inflation largely reflects “factors that are expected to be transitory.”

That change echoes recent shifts in Powell’s public remarks.