Federal Reserve keeps interest rates stable, says cut in upcoming bond purchases “soon”

The Federal Reserve kept benchmark interest rates close to zero on Wednesday, but said rate hikes could come a little earlier than expected while significantly reducing their economic outlook for this year.

Along with these widely anticipated measures, officials at the Federal Policy Committee have indicated that they will begin to withdraw some of the stimulus packages provided by the central bank during the financial crisis. There was no indication, however, as to when this might happen.

“If progress continues broadly as planned, the Committee considers that a moderation in the pace of asset purchases may soon be warranted,” the FOMC statement said after the meeting. Respondents to a recent CNBC poll indicated that they expect the reduction in bond purchases to be announced in November and begin in December.

In light of these expectations, the committee voted unanimously to keep short-term rates pegged near zero. However, more members are now seeing the first rate hike occur in 2022. In June, when members last released their economic projections, a slight majority postponed the hike to 2023.

More information could arrive when Fed Chairman Jerome Powell speaks at his post-meeting press conference at 2:30 p.m. ET.

Markets reacted little to the news from the Fed initially, with major equity averages continuing to show strong gains and government bond yields mixed.

Substantial changes have been made to the Fed’s economic forecast, with lower growth prospects and higher inflation expectations.

The committee now sees GDP growing by just 5.9% this year, down from a forecast of 7% in June. However, growth in 2023 is now set at 3.8%, down from 3.3% previously, and 2.5% in 2023, up a tenth of a percentage point.

The projections also indicated that FOMC members see higher inflation than reported in June. Core inflation is expected to rise 3.7% this year, from the 3% forecast the last time Members indicated their expectations. Officials then see inflation at 2.3% in 2022, compared to the previous projection of 2.1%, and 2.2% in 2023, a tenth of a percentage point higher than the June forecast.

Including food and energy, authorities expect inflation to hit 4.2% this year, down from 3.4% in June. The next two years are expected to fall back to 2.2%, little change from the June outlook.

In another move, the Fed said it would double the buyback level of its daily market operations to $ 160 billion from $ 80 billion.

Markets had expected few major decisions from the meeting, but were partly on the verge of when the Fed will begin to reduce the pace of its monthly bond purchases.

Powell said in August at the Fed’s annual symposium in Jackson Hole, Wyoming, that he and others believed the central bank had hit its inflation target and could start cutting the $ 120 billion minimum. dollars per month for the purchase of treasury bills and mortgages. backed titles.

Investors were also awaiting the meeting’s position of Fed officials on the inflation outlook.

The Fed’s favorite measure of inflation – the personal consumption expenditure index minus food and energy prices – accelerated 3.6% in July, the highest level in 30 years. However, Powell has repeatedly stated that he expects price pressures to ease as supply chain factors, commodity shortages and unusually high levels of demand return to consumers. pre-pandemic levels.

—Correction: There are an even number of members who see a rate hike in 2022 as no, although the central tendency is listed as an increase next year in the Fed’s summary of economic projections. An earlier version misinterpreted the individual expectations of committee members.

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