Interest Rate Unchanged, Fed to Start Taper by $15 Billion

The Federal Reserve said it will begin winding down its monthly asset purchases later this month at a pace of $15 billion per month, while expressing less certainty that the jump in inflation will prove temporary.

The Fed said it would reduce Treasury purchases by $10 billion and mortgage-backed securities by $5 billion, putting an end to the program of shielding the economy from Covid-19.

The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%. The decision was unanimous.

After reductions in November and December, “the committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” the U.S. central bank’s policy-setting FOMC said in a statement Wednesday following a two-day meeting.

As for market reactions, 10-year Treasury yields rose while the dollar and S&P 500 were little changed.
Investors widely expected the announcement on asset purchases at this meeting as Fed officials including Chair Jerome Powell had signaled the move. Powell will hold a press conference at 2:30 p.m. in Washington.

Powell’s term expires in February, and President Joe Biden said Tuesday he would announce his choice for chair and other openings “fairly quickly”.

The pace of the taper clears the way for a possible interest-rate increase in the second half of 2022, with nine of 18 officials forecasting a move next year in their September outlook. Wednesday’s statement reiterated that rates will be held near zero until the economy achieves maximum employment.