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The Federal Reserve signaled on Wednesday that it was almost ready to cut its bond buying program and could even postpone its schedule of interest rate hikes until 2022, reflecting the firm belief that the economy is on. the road to full recovery.
President Jerome Powell said the Fed could “easily move” in November to announce that it would cut its bond purchases if the economy continued to grow.
He also noted that inflation is now well above the Fed’s 2% target, although he maintained his view that it should slow significantly over the next year.
The Fed has bought $ 80 billion in treasury bills and $ 40 billion in mortgage-backed securities each month since last summer to keep long-term interest rates low and stimulate demand as l economy is recovering from the coronavirus pandemic.
Since the summer, the Fed has been talking about slowing down its bond purchases. The central bank has been cautious, however, fearing that the “tantrum” that rocked global financial markets could recur in 2013.
The official announcement could come at the Fed’s Nov. 2-3 meeting, barring a major setback to the economy or another coronavirus outbreak, Powell said. He made his remarks at a press conference after the Fed’s last two-day strategy session.
He said Fed officials believe it is appropriate that the reduction program be gradual and end “around the middle of next year.” He made his remarks at a press conference after the Fed’s last two-day strategy session.
“Today, the Fed moved closer to the start of tapering, appeared willing to hike policy rates more aggressively than before, and revealed slightly more concerns about inflation,” said the BMO Capital Markets Assistant Chief Economist Michael Gregory.
In its updated projections, the Fed also forecast three interest rate hikes in 2023 and three more in 2024, raising the benchmark interest rate to 1.8% by the end of the period.
However, the Fed’s so-called dot chart suggested that the central bank could raise interest rates for the first time since the pandemic by 2022. Previously, the Fed had indicated that the first rate hike would occur until ‘in 2023.
Powell, as he has done before, warned investors not to read too much of the Fed’s dot chart or assume that a rate hike is in the pipeline next year.
Read: Fed dot plot signals US interest rate hike in 2022, but Powell warns it’s not set in stone
The Fed stuck to its forecast of inflation returning to 2.2% next year. The central bank expects the inflation rate to peak around 4.2% in 2021, according to its new projections.
Many economists doubt that inflation will drop as quickly as the Fed expects, and even some senior central bank officials are skeptical.
Read: The Fed has bet on a future of low inflation. Here’s what could go wrong
The growth of the US economy, for its part, is expected to slow from around 5.9% this year to 3.8% in 2022 and 2.5% in 2023. The long-term growth potential of the economy is estimated at around 2.5% per year.
The unemployment rate is also expected to fall to 3.5% by 2023 and match the 50-year low that existed before the start of the pandemic.
The sunnier forecast for the economy underscores why the Fed is ready to begin unwinding its unprecedented support for the U.S. economy during the pandemic.
US DJIA equities,
earned and the 10-year benchmark bond yield TMUBMUSD10Y,
edged up after the Fed’s statement.
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