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Wednesday, December 1, 2021

The Fed is expected to announce a reduction in asset purchase plans

The Federal Reserve is expected to announce that it will begin to phase out its $120 billion monthly bond purchase plan because it faces more obvious price pressures and the forecast that it will raise interest rates next year.

The Federal Open Market Committee of the U.S. Central Bank will release its latest statement at 2 pm Eastern time on Wednesday, and then Chairman Jay Powell will hold a press conference.

Economists expect the Fed to announce that it has made “substantial further progress” in achieving an average 2% inflation target and maximum employment rate, and will begin to reverse the emergency policy settings it made last year to offset economic growth. Damage caused by the coronavirus pandemic.

The Federal Reserve has hinted that it may reduce the purchase of Treasury bonds by $10 billion and the purchase of agency mortgage-backed securities by $5 billion each month. If the process starts on November 15th as expected, the stimulus plan will be completely stopped before June 2022.

The announcement came as inflationary pressures surprised policy makers and economists.

Exuberant consumer demand is in direct conflict with severe supply chain disruptions, causing prices in certain industries to soar for longer than expected. Rising rents and wage pressures amid a severe shortage of workers have also raised concerns that inflation will be more sticky than the Fed’s current “temporary” assessment suggests.

Economists said that the current situation requires a change in the Fed’s statement, including some acknowledgments that supply-related issues may harm the economic recovery, and that the central bank is carefully monitoring the upcoming inflation data.

It is expected that the Fed’s main policy interest rate will not be adjusted, and the interest rate will be close to zero. Powell may reiterate that starting to cut interest rates is not a signal of the timing of future interest rate hikes.

But in recent weeks, this message has been challenged as investors have increased their bets that the Fed will start raising interest rates shortly after its stimulus plan ends in June.

This move echoes the sudden actions taken by many central banks around the world to tighten monetary policy, including the Reserve Bank of Australia and the Bank of Canada.

As a result, short-term US government bonds have risen sharply, and the policy-sensitive two-year yield is currently only slightly below the recent high of over 0.50%. In early September, it hovered at a level close to 0.20%.

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