Fed Meeting Recap: Rates steady, tapering to begin
As expected, the Federal Reserve Open Markets Committee (FOMC) left interest rates unchanged and announced it would begin tapering the pace of its asset purchases. The FOMC said in their statement that "substantial further progress" has been achieved since December 2020, establishing the rationale for the taper. Under the plan, the Fed will slash purchases of Treasury securities by $10 billion and purchases of mortgage-backed securities by $5 billion per month.
The announcement marks the beginning of the end to the Fed’s emergency pandemic support, which currently includes asset purchases of up to $120 billion per month. The pace of tapering laid out by the Fed today would have asset purchases wound down to zero by June of 2022.
The announcement emphasized the Fed would have flexibility to adjust the pace of tapering as economic conditions warranted. According to Fed Chairman Jerome Powell, these reductions "will likely be appropriate each month" but the Fed will be prepared to adjust "if warranted by changes in the economic outlook."
Inflation expect to be transitory
In recent months, the Fed has been under increased pressure to pull back on emergency accommodation as inflation soared. According to Powell, inflation pressures should ease because they "largely reflect factors that are expected to be transitory" as the economy continues to recover from the pandemic and the supply-chain issues associated with it. Whether or not the spike in inflation is purely transitory remains to be seen and will likely have plenty of influence on the Fed’s future actions.
No interest rate hikes for now
There was no overt comment on future rate hikes, though most market participants expect two 25bps rate hikes in the second half of 2022, after the asset purchase program is retired. Today’s enhanced inflation language in the Fed’s statement suggests the Fed could hike rates sooner than expected, if needed.
With the Fed announcement mostly in-line with expectations, market reactions were largely contained. Stocks ended the day on a positive note with the Dow Jones Industrial Average climbing nearly 250 points into the close. Bond markets gave up morning gains, as interest rates climbed slightly higher.
Jeremy Collett is Guaranteed Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process.
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