Fed likely to rein in low interest rates

Weak August jobs report will probably push cut in bond purchases to November

WASHINGTON — The Federal Reserve is expected this week to send its clearest signal yet that it will start reining in its ultra-low-interest rate policies later this year, a first step toward unwinding the extraordinary support it’s given the economy since the pandemic struck 18 months ago.

Many economists think the Fed will formally announce a pullback in November, in response to a steady recovery from the pandemic recession and an acceleration in inflation that has raised widespread concerns. This week’s Fed policy meeting could lay the groundwork for that announcement.

Morgan Stanley’s Michael Wilson said stocks could drop about 10 percent as the Fed pares back on its support for markets. The Fed is due to deliver its latest economic and interest rate policy update on Wednesday.

When their meeting ends Wednesday, Fed officials are set to keep their shortterm benchmark interest rate, which affects many consumer and business loans, near zero.

They are also likely to maintain their $120 billion in monthly bond purchases, which are intended to hold down long-term loan rates. In December, the Fed said it would continue those purchases until the economy had made “substantial further progress” toward its goals of maximum employment and annual inflation averaging 2 percent over time.

In a speech last month, Fed Chair Jerome Powell said such progress had already been met for inflation.

Powell also said “clear progress” had been achieved in job growth and that if hiring remained healthy, it “could be appropriate” to start reducing the bond purchases this year.

A surprisingly weak

August jobs report made it less likely that the Fed would formally announce a reduction in September and more likely it would do so in November or December.

The central bank could signal in a statement it will release after its meeting ends Wednesday that it plans to soon announce a reduction in the pace of its bond purchases, and Powell could reinforce that message in a news conference to follow.

“A dud of an October jobs report could change these plans,” said Michael Feroli, an economist at Jpmorgan Chase and a former Fed staffer, “but it would probably take something quite bad to knock them off track now.”