Fed Now Expects Inflation to Linger

Central bank is going to start dialing back economic aid
By Newser Editors and Wire Services
Posted Nov 3, 2021 2:14 PM CDT
Federal Reserve Is Dialing Back Economic Aid
A television screen on the floor of the New York Stock Exchange shows the rate decision of the Federal Reserve, Wednesday, Nov. 3, 2021.   (AP Photo/Richard Drew)

The Federal Reserve will begin dialing back the extraordinary 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, the AP reports. Those purchases have been intended to hold down long-term interest rates to encourage borrowing and spending. With the economy recovering, that's no longer needed.

The Fed will slow its $80 billion in Treasury purchases by $10 billion a month and its $40 billion in mortgage-backed securities by $5 billion in November and December. The central bank said similar reductions "will likely be appropriate" in the following months, suggesting it 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 increasingly 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 low-rate policies, which it hopes will slow inflation, without doing that so rapidly as to weaken the job market or even cause another recession. (Read more Federal Reserve stories.)

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