The Strategist

US Fed ready to start winding down asset buybacks

09/23/2021 - 06:41

At its September meeting, the US Federal Reserve (Fed) decided to keep its key rate at 0-0.25% per annum. At the same time, the regulator came close to announcing the winding down of the asset purchase programme - its statement indicated that such a decision could become "justified in the near future".

Federalreserve via flickr
Federalreserve via flickr
The US Federal Open Market Committee refrained from changing the rate (urgently reduced to 0-0.25% in March 2020). The updated dot plot with rate forecasts now assumes a possible rate hike as early as next year - the number of votes is equally divided (in June the plot envisaged two rate hikes only in 2023). In 2023, 17 of 18 members of the committee now expect a rate hike.

The main change concerned the prospects of winding down the quantitative easing program: the Fed indicated that it could happen "soon". The current volume of tapering is at least $120bn a month ($80bn government bonds and $40bn mortgage-backed securities). The regulator said that the economy has shown progress on employment and inflation targets, and if the situation continues to develop as expected, then a reduction in redemptions soon "may be warranted". Fed chief Jerome Powell noted that inflation could remain elevated due to supply concerns and did not rule out that the bailout programme could be completed by mid-2022.

In its assessment of the economy, the institution reiterated that indicators of economic activity and employment had continued to improve and sectors most affected by the pandemic were recovering, but that an increase in new cases of coronavirus infection had slowed the process. At the same time, the wording on the state of inflation has been adjusted and is now "at an elevated level, a consequence mainly of temporary factors".

The macro forecast was also significantly changed: The Fed lowered its estimate of US GDP growth for the current year from 7% to 5.9% and raised it from 3.3% to 3.8% next year. In 2023, the prognosis was cut from 2.5% to 2.4% and in 2024 (this is the first estimate), a slowdown to 2% is expected. By contrast, the unemployment rate in the USA has been raised from 4.5% to 4.8% for this year. Inflation has also been revised upwards from 3.4% expected in June to 4.2%; in 2022 and 2023 it will slow down to 2.2% (only slightly changed forecast here); in 2024 it could reach 2.1% and in the medium term to 2%. Consumer spending inflation, which is the regulator's target, accelerated to 4.2% in July, excluding food and energy to 3.6% from 4% (3.6%) a month earlier. The unemployment rate fell further by 0.2 points to 5.2% in August.