Tap time: US Fed to start cutting monthly bond purchases | Business and Economy News

Fed chief Jerome Powell said the US labor market could improve enough to reach “peak employment” by mid-2022.

The United States Federal Reserve will begin to cut back some of the extraordinary support it has given to the country’s economy since the coronavirus pandemic hit last year. But he again signaled that there is no rush to raise interest rates until the country’s labor market fully recovers from last year’s COVID-19 blow.

Last year, at the height of the pandemic, the Fed lowered interest rates to near zero and started buying bonds at a rate of $ 120 billion per month. At the end of their two-day policy meeting on Wednesday, Fed officials voted unanimously to begin cutting those bond purchases later this month.

In light of the further substantial progress the economy has made towards the goals of the Fed’s Federal Open Market Committee since last December, the committee has decided to start slashing the monthly pace of its net asset purchases by $ 10 billion. dollars for Treasury securities and $ 5 billion for mortgage-backed securities agencies.

The Fed also said it would cut bond purchases by an additional $ 15 billion in December and “that similar reductions in the pace of net asset purchases will likely be appropriate each month.” Its committee announced that it was “ready to adjust the pace of purchases if the evolution of the economic outlook warrants it”.

The taper’s announcement was widely expected – as was the unanimous vote to leave interest rates unchanged.

The Fed and its leader Jerome Powell are sticking to their scenario that they are in no rush to raise interest rates even if inflation is well above the central bank’s 2% target rate.

“Our decision today to start reducing our asset purchases does not imply any direct signal about our interest rate policy,” Powell told reporters at his press conference after the meeting.

“We don’t think there is yet time to raise interest rates. There is still some way to go to achieve maximum employment both in terms of employment and conditions of participation.

Still not worried about inflation

Consumer prices in the United States rose 5.4% in September compared to the same period a year earlier. This rate corresponded to the months of June and July and brought the annualized inflation rate back to its highest level in 13 years.

While Powell said he and his fellow policymakers expect the main drivers of inflation – namely bottlenecks and supply chain shortages – to persist for much of the year. Next year, they see the pressure on prices eventually recede.

“We continue to believe that our vibrant economy will adjust to supply and demand imbalances, and that, as it does, inflation will drop to levels much closer to our longer term target of 2 %, “said Powell.

US stocks responded to the Fed’s latest move with the S&P 500 – an indicator of US college retirement and savings accounts – and the Dow Jones Industrial Average hitting new all-time highs.

The S&P 500 gained 0.65% to close at 4,660.64 points, the Dow Jones rose 0.29% to 36,158.27 and the tech-rich Nasdaq Composite Index gained 1.02% to end the session at 15,809.65.

On the jobs front, Powell said it’s possible the US labor market will hit “peak employment” by the middle of next year. But he also told reporters that it was important not to act like he had a magic crystal ball that can predict the future.

“We are in a different world now,” he continued. “The pandemic recession was the deepest and the recovery was the fastest and wages haven’t really gone down. And you know, real income has been more than completely replaced by tax policy. This is all completely unusual.

A record 4.3 million Americans quit their jobs in August – nearly 3% of all employed workers in the United States – as the number of job postings hovered around a record high of 10.4 million.

To attract workers, companies responded by offering signing bonuses or bigger paychecks. In September, the cost of employment index, which measures wages, salaries and benefits, rose 1.3% – the biggest jump on records in 20 years.

But Powell said the economy was showing no signs of a “wage-price spiral” that could force the Fed to act sooner than expected and raise interest rates to contain inflation.