Federal Reserve Chair Jerome Powell said the central bank could begin scaling back asset purchases as soon as November and complete the process by mid-2022, after officials revealed a growing inclination to raise interest rates next year.

Powell, explaining the U.S. central bank’s first steps toward withdrawing emergency pandemic support for the economy, told reporters Wednesday that tapering “could come as soon as the next meeting.” 

That refers to the policy gathering on Nov. 2-3, though he left the door open to waiting longer if needed and stressed that tapering was not meant to start a countdown to liftoff from zero interest rates.

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff,” he said following the completion of the two-day gathering of the Federal Open Market Committee. He said he didn’t expect the Fed to begin rate increases until after completing the taper process.

His performance was being parsed both by investors and the White House: The central bank chief’s term expires in February and President Joe Biden is expected to decide this fall whether or not to renominate him to another four years in his post.

In addition to signaling a scale back in upcoming bond buying, officials also published updated quarterly projections which showed officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year, according to the median estimate of FOMC participants. In June, the median projection indicated no rate increases until 2023.

“We’re seeing a Fed that is getting more hawkish,” Diane Swonk, chief economist at Grant Thornton LLP, said in an interview on Bloomberg Television after the statement was published.

U.S. stocks pared gains, while yields on 10-year Treasuries pushed higher.

New Projections

The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25 per cent, and continue purchases of Treasuries and mortgage-backed securities at a pace of US$120 billion per month. The vote was unanimous.

Projections for 2024 were also published for the first time, with the median suggesting a federal funds rate of 1.8 per cent by the end of that year. The median for 2023 rose to 1 per cent, from 0.6 per cent in the June projection. 

“Participants generally expect a gradual pace of policy firming that would leave the level of the federal funds rate below estimates of its longer-run level through 2024,” Powell said.

What Bloomberg Economists Say

“A small upward revision for 2022 inflation suggests the Fed is holding on to the “transitory” hypothesis, and expects price pressure to converge closer to its target next year. Still, the hawkish shift in the dot plot suggests that, for now, it’s concern about price stability that is the greater focus of attention for the FOMC.”

-- By Anna Wong, Andrew Husby and Eliza Winger (economists)

“Participants generally expect a gradual pace of policy firming that would leave the level of the federal funds rate below estimates of its longer-run level through 2024,” Powell said.

Other Forecast Takeaways (median estimate):

• FOMC median projection for 2022 inflation rose to 2.2 per cent from 2.1 per cent in June; held the 2023 forecast at 2.2 per cent
• Unemployment 3.8 per cent 2022, 3.5 per cent 2023; no change from June forecast
• GDP growth seen at 3.8 per cent in 2022, 2.5 per cent in 2023, both higher than the prior projections

The Fed also said it would double the per-counterparty limit on its overnight reverse-repurchase agreement facility to US$160 billion daily. 

The U.S. unemployment rate fell to 5.2 per cent in August, well below the April 2020 peak of 14.8 per cent. But it’s still above the 3.5 per cent rate that prevailed in February 2020, just before the pandemic struck. Fed officials have said they expect to keep the funds rate near zero “until labor-market conditions have reached levels consistent with the committee’s assessments of maximum employment.”

Inflation, according to the Fed’s preferred measure, was 4.2 per cent in the 12 months through July, well above the central bank’s 2 per cent target. Many Fed officials have said they expect it to return to around 2 per cent after temporary supply-chain disruptions resulting from the pandemic have been resolved, though several have also cited the rapid price increases as a reason to begin raising rates as early as next year.