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.
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