Fed holds rate but begins to reduce bond purchases

      The U.S. Federal Reserve left its key interest rates steady but joined other central banks worldwide that are rolling back the extraordinary stimulus injected into the global economy last year by trimming the purchase of bonds later this month.

      The Federal Reserve (Fed) left its target range for the federal funds rate at 0.0 - 0.25 percent, unchanged since March last year when it lowered the rate twice by a total of 1.50 percentage points.

      As in September, when the Fed's policy-making arm the Federal Open Market Committee (FOMC) last met, it said economic activity and employment had continued to strengthen though the rise in COVID-19 cases in recent months slowed the recovery of some sectors that were hardest hit by the pandemic.

     "In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities," FOMC said.

     As many other central banks, such as the Bank of Canada, Bank of England and European Central Bank, the Fed used bond purchases, known as quantitative easing, to keep interest rates low and stimulate economic activity.

     But with economic activity worldwide bouncing back from the pandemic and inflation rising, central banks are now tightening the reins and in some cases - such as the Reserve Bank of Australia and the Bank of Canada - starting by reducing the injection of liquidity into financial markets.

     Starting this month, the Fed will cut its monthly purchases of Treasury securities to $70 billion from $80 billion and the purchase of agency mortgage-backed securities to $35 billion from $40 billion for a total reduction of $15 billion to $105 billion from the previous $120 billion.

     This reduction will continue in December, with the monthly purchase lowered by another $15 billion to a total of $90 billion, with this pace in the reduction of purchases likely to continue unless there is a change in the economic outlook, the FOMC said.

     If the Fed maintains this pace of reducing purchases, it will first end all asset purchases - known as quantitative easing - in eight months, or June 2022. In comparison, the Bank of Canada began lowering its asset purchases in April this year and ended it in seven months later in October.

     Reiterating its recent guidance, the Fed said there were still risks to the economic outlook from the public health crises and it is "prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

     As in most other countries, inflation has risen faster than expected only a few months ago and in September the Fed raised its forecast for inflation this year and pulled forward the timing of rate hikes.

     Although the Fed is still using to use word "transitory" to describe inflation, it made a slight, but important, change to its statement that signals it is less confident the rise in inflation is purely temporary.

     In today's statement the FOMC inserted the word "expected" about the transitory factors that are leading to elevated inflation as compared with September when it said, matter-of-factly, these factors were transitory.

     The Fed added supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases.

     The Board of Governors of the Federal Reserve System released the following statement by the Federal Open Market Committee (FOMC):

"The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer's rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller."

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