MNI: Fed Starts QE Taper And Expects Transitory Inflation

The Federal Reserve said Wednesday it would begin reducing its QE program by USD15 billion per month, saying elevated inflation is expected to be transitory and offering few hints on the path of interest rates.

"In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by USD10 billion for Treasury securities and USD5 billion for agency mortgage-backed securities," the Fed said in its post-meeting statement. "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 Fed's balance sheet grew to USD8.6 trillion from USD4.2 trillion under the QE program as it bought USD120 billion per month starting right after the pandemic struck the world economy. The taper process is set to last eight months according to the Fed's current indications.

Fed officials described economic activity and employment as strengthening, but added that "supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors." The September statement described inflation as "elevated, largely reflecting transitory factors" but today it added such factors were "expected" to be transitory. MNI has reported the Fed is gradually moving away from that language.

See a comparison of the November policy statement to the September version: MNI - FOMC Statement Comparison November 2021.pdf

VACCINATION PROGRESS CURBING INFLATION?

Fed Chair Jerome Powell will likely get pressed on the timing of hiking near-zero interest rates during his post-meeting press conference. He will probably emphasize that the Fed's decision to taper does not mean the Fed will hike interest rates right after it's done tapering. Market expectations and even the Fed's own forecasts are starting to converge on mid- to late 2022 as the apparent timing of a first rate increase.

The Fed needs to be at least ready to raise rates by then if inflation pressures fail to ebb, St. Louis Fed economist David Andofatto told MNI in a recent interview.

Core PCE inflation jumped at the fastest pace in 30 years in September and the 5-year breakeven inflation rate also topped 3% for the first time on record last month.

"Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation," the FOMC said. "Risks to the economic outlook remain."