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United States Monetary Policy November 2021

United States: Fed keeps rates at effective floor in November; decides to taper its QE purchases

At its meeting on 2–3 November, 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 November, it will increase its holdings of Treasury securities by at least USD 70 billion per month, down from USD 80 billion previously, and its holdings of agency residential and commercial mortgage-backed securities by at least USD 35 billion per month, down from USD 40 billion previously. Moreover, the Committee announced it will further reduce its purchases in December, to at least USD 60 billion per month for Treasury securities and USD 30 billion per month for agency residential and commercial mortgage-backed securities.

The Fed kept the target range unchanged due to the economic turmoil caused by the ongoing public health crisis. Despite economic activity continuing to gain momentum in recent months amid ample fiscal stimulus, employment is expected to remain below its pre-pandemic levels in the short term and the sectors most affected by Covid-19-related restrictions remain fragile, although they continue to show signs of improvement. 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 labor markets fully recover. 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. The majority of our panelists see the federal funds target rate ending this year at 0.25% and expect the first rate hike some time in 2023.

Commenting on November’s meeting, James Orlando, senior economist at TD Economics, noted:

“The move today was well telegraphed. Equity markets, which are at all-time highs were little changed post-announcement. The same goes for the trade-weighted U.S. dollar, which has been trying to test the 2020 peak over the last few weeks. On the other hand, U.S. Treasury yields are rising. The UST 5- and 10-year yields were up another four basis points on the announcement. We expect economic momentum to continue to improve heading into 2022, which should provide greater support for risk assets as well as a steady increase in bond yields.”

The next FOMC meeting is scheduled for 14–15 December.

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