Type to search

US Fed To Scale Back Bond Purchases

S&P 500 hits record high after announcement that central bank would reduce Treasury securities purchases by $10 billion a month


Federal Reserve
The US Fed building in Washington. It’s the ocean of global liquidity that’s the real problem, even if it is an event such as a disorderly unravelling of an Evergrande that exposes fragilities in the world economy. Photo: Reuters

 

The US Federal Reserve said on Wednesday it would begin scaling back its bond-buying programme this month as the US economy continues its recovery from the coronavirus pandemic and contending with surging inflation.

The central bank’s Federal Open Market Committee (FOMC) ended a two-day policy meeting with a pledge to reduce its purchases of Treasury securities by $10 billion a month and agency mortgage-backed securities by $5 billion a month.

The move corresponded with abrupt actions by a number of central banks around the world to tighten monetary policy, including the Bank of Canada and Reserve Bank of Australia.

Markets expect the Bank of England, which meets on Thursday, to raise interest rates for the first time since 2018 and the European Central Bank could follow suit in 2022.

The S&P 500, which dipped earlier in the day, hit a record high after the Fed’s announcement, closing at 4,660.57 points, up 29.92 points or 0.65%.

The FOMC said it was able to withdraw the stimulus because it had achieved “substantial further progress” towards its goals of near-full employment and inflation averaging 2%.

“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,” it said in a statement.

“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 added.

‘Adjust the Pace’

The FOMC said similar reductions in the pace of net asset purchases would be made each month, “but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook”.

Worries over inflation would soon pass, the committee indicated. “Inflation is elevated, largely reflecting factors that are expected to be transitory.”

The Fed said its purchases and holdings of securities would “continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses”.

Its statement noted progress on vaccinations but suggested Covid19 was far from over for American businesses.

“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,” the bank said.

Analysts said the announcement delivered no surprises, although Aichi Amemiya at Nomura said “the committee held more firmly to its transitory inflation narrative than we expected”.

 

• George Russell

 

READ MORE:

Recovery Fears Continue to Put a Dampener on Asia’s Markets

Australian Central Bank Loses Control of Bond Yields

Treasury Yields Continue Downward Drive After Fed Minutes

 

 

George Russell

George Russell is a freelance writer and editor based in Hong Kong who has lived in Asia since 1996. His work has been published in the Financial Times, The Wall Street Journal, Bloomberg, New York Post, Variety, Forbes and the South China Morning Post.

logo

AF China Bond