The Federal Reserve committed on Wednesday to using “its full range of tools” to promote maximum employment and price stability goals, characterising the current high inflation as “transitory” and the overall financial conditions as “accommodative”.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the Fed’s statement said, signalling its move towards a more “patient” approach.
“The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved,” it continued.
At a press conference following the decision’s announcement, Fed chair Jerome Powell said that while supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to “sizable price increases in some sectors”, “our dynamic economy” will adjust and “inflation will decline to levels much closer to our 2 percent longer-run goal”.
Over the last month, inflation has been double the Fed’s 2 per cent target.
“If we were to see signs that the path of inflation, or longer-term inflation expectations, was moving materially and persistently beyond levels consistent with our goal, we would use our tools to preserve price stability.
“We will be watching carefully to see whether the economy is evolving in line with expectations,” Mr Powell said.
Taper begins
As widely expected, the Fed confirmed it would begin cutting its US$120 billion in monthly purchases of Treasuries and mortgage-backed securities at US$15 billion per month, beginning in November and concluding around the middle of next year.
Mr Powell confirmed the tapering “does not imply any direct signal regarding our interest rate policy.”
“We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate.”
Commenting on the Fed’s statement, head of multi-asset at Janus Henderson Investors Paul O’Connor said that while the Fed can take comfort in the absence of a “market tantrum” in response to its taper, “today’s actions are only the first step down the long road towards monetary normalisation”.
“The policy challenges from here will be formidable, given the uncertainty surrounding US labour market and inflation dynamics and the appropriate scale and speed of future interest rate moves, from today’s unusually low levels.”
Currently, the markets are expecting the Fed to lift rates when it finishes tapering in June.
