Fed poised to begin tapering as early as next month

The Federal Reserve is poised to begin phasing out its pandemic-era stimulus programme as early as next month and wrap up the process by mid-2022, as the economic recovery advances and more officials pencil in an interest rate rise next year.

Minutes from the September meeting of the Federal Open Market Committee showed officials firming up their plans for the eventual end to the $120bn monthly asset purchase programme that has been in place since last year to bolster financial markets and the economy.

Consensus is building for a reduction or “taper” of those bond-buys “soon”, according to the minutes, as the Fed moves closer to declaring victory on achieving “substantial further progress” towards its dual goals of inflation that averages 2 per cent and maximum employment.

“Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December,” the minutes said

The record also shows support for the Fed to pull back its Treasury purchases by $10bn per month and its purchases of agency mortgage-backed securities by $5bn. That would mean the stimulus ends during the second half of next year.

Fed chair Jay Powell hinted at this timeline during the press conference following the September meeting, at which he said it would take only a “decent” jobs report for the employment threshold to be met to begin the taper.

While September’s jobs report was far weaker than expected, Atlanta Fed president Raphael Bostic told the FT on Tuesday that this should not deter the central bank from moving forward with its policy adjustment next month.

Fed officials expect continued improvement in the labour market in the coming months, although “various” participants said a “complete” return to pre-pandemic conditions was “unlikely” because of higher levels of retirement during the pandemic and other factors reducing the size of the workforce.

The minutes also suggested mounting concern about intensifying supply-chain disruptions, which have helped to propel US consumer price growth to a 13-year high and allowed the Fed to achieve its inflation goal far faster than expected.

The Fed stuck by its characterisation of the ongoing inflation surge as “transitory”, but said that “some” participants expressed concerns that price pressures are broadening out beyond sectors most sensitive to the economic reopening.

It added that “many” participants said owners’ equivalent rent, which measures what homes would be rented for, should be “monitored carefully” as well.

The September meeting featured updated projections for both the economic outlook and the potential path forward for interest rates. Fed officials simultaneously marked down their growth forecasts for the year and raised their inflation estimates.

An increasing number of participants also pencilled in an interest rate increase next year, leaving the 18 participants now evenly split on that outcome. At least three interest rate increases are anticipated by the end of 2023.