United States: Fed keeps rates at effective floor in December; speeds up tapering of its QE purchases
At its meeting on 14–15 December, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%, which was widely expected by market analysts. That said, the Fed decided to reduce the monthly pace of its net asset purchases. In January, it will increase its holdings of Treasury securities by at least USD 40 billion per month, down from USD 60 billion in December, and its holdings of agency residential and commercial mortgage-backed securities by at least USD 20 billion per month, down from USD 30 billion previously.
The Fed kept the target range unchanged due to the ongoing economic turmoil caused by the public health crisis. Despite economic activity continuing to gain momentum in recent months amid ample fiscal stimulus and progression on the vaccination campaign, employment is expected to remain below its pre-pandemic levels in the short term. Moreover, although the sectors most affected by Covid-19-related restrictions are improving at a brisk pace, they continue to struggle. Nevertheless, elevated inflationary pressures since April have raised concerns over the extent to which price pressures remain transitory, prompting the Fed to begin tapering its stimulus.
Looking ahead, the Fed reaffirmed it will “adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals”, although it will likely keep the target policy rate at its current level until the labor market reaches levels consistent with the Committee’s assessment of maximum employment. That being said, the Bank noted that the economy is progressing towards its goals and the easing of its QE purchases should continue to progress in line with the pace of the economic recovery. Consequently, the Fed is two meetings away from completing its QE purchasing program, which should occur in March 2022. The Fed’s updated projections see roughly three rate hikes delivered next year.
Commenting on December’s meeting, James Orlando, senior economist at TD Economics, noted:
“Naturally, people are questioning how the Fed can feel so confident in reducing the amount of its monetary support given the rising Omicron risks. To answer that we turn to the Fed’s own forecast, which shows that the setback will likely prove short-lived and won’t have a lasting impact on the economy. With the economic recovery likely to continue, this will allow the unemployment rate to reach full employment in 2022, while inflation is expected to remain elevated over the next few years.”
The next FOMC meeting is scheduled for 25–26 January.