In his post-meeting press conference on Nov. 3, 2021, Federal Reserve Chair Jerome Powell indicated that the FOMC "will start to reduce the pace of asset purchases," in a process called tapering. The Fed has been purchasing $80 billion in U.S. Treasury securities and $40 billion in U.S. agency securities each month. Powell stated that, starting in December 2021, these monthly asset purchases initially will be reduced by $10 billion for Treasury securities and $5 billion for agency securities.
Powell noted that "our asset purchases have been a critical tool" supporting the economy and the markets. However, he responded to a later question by saying, "It is time to taper since the economy has reached major goals."
- The Fed will start reducing monthly bond purchases in December 2021. Purchases will initially drop from $120 billion to $105 billion.
- The goal is to have no net new purchases by mid-2022, but the path to this goal will depend on economic developments.
- The Fed expects inflation to abate in the second half of 2022 and does not plan to increase interest rates.
December 2021 Update
- On Dec. 15, 2021, Powell announced that the FOMC will double the pace of tapering, reducing the amount of bond purchases by $30 billion each month.
- This policy change was in response to a "robust" economic expansion, particularly strong gains in employment, as well as rising inflation.
- As a result, net new purchases of bonds will end by March 2022, ahead of the previous schedule.
Tapering Earlier and Faster
In response to a question, Powell acknowledged that the announced tapering is "earlier and faster" than most observers had anticipated six months ago. The reason, he elaborated, is that the pace of economic recovery has been stronger than expected, with the U.S. economy having expanded by 6.5% in the first half of 2021, accompanied by a strong job market in which openings are still going unfilled.
While he noted that the pace of growth subsequently dipped somewhat, partly due to the emergence of the delta variant of COVID-19, the Fed Chair indicated that, more recently, "receding COVID cases and rising vaccinations" point to another uptick in growth going forward. Moreover, he added, "aggregate demand has been very strong."
Powell also emphasized that the pace of tapering will be adjusted in response to actual economic developments. "We remain attentive to risk and will monitor plausible outcomes," he stated. In a similar vein, Powell noted, "Policy will adapt appropriately."
Powell stated that the FOMC's goal is to cease adding to its securities holdings by the middle of 2022. He added that, despite tapering, the Fed's stance will remain "accommodative," still seeking to keep interest rates near zero. "It would be premature to raise rates now," he said in response to a question about inflation.
Powell reiterated his assertions made in earlier press conferences that the recent uptick in inflation has been mainly a result of "supply constraints and bottlenecks." He noted that "bottlenecks and supply chain disruptions" due to the pandemic have produced "supply constraints" that have been "larger and longer-lasting than expected."
Powell cautioned that "the Fed's tools cannot cure supply constraints" and predicted that bottlenecks and elevated inflation will persist into 2022 but decline in Q2 and Q3 of that year as pandemic effects abate. After that, he expects inflation to decline to the Fed’s longer-run goal of 2%. Nonetheless, if the Fed sees that "the path is materially and consistently above our goal," it will use its tools to achieve that goal.
Employment and Wages
Powell observed that the unemployment rate was 4.8% in September 2021, but said that it is somewhat "understated" given that labor force participation rates have declined. In response to a question about The Great Resignation of workers from the labor force, he said that the issue is a complex one, also involving an increased pace of retirements.
As in previous press conferences, Powell noted that joblessness has been disproportionately high among minorities. Despite the challenges, he believes that maximum employment can be achieved by the second half of 2022, based on a variety of measures.
While observing that "wages have been moving up strongly, very strongly," he added that they have lagged inflation. Wage growth, he said, would become a worry for the Fed only if it moves "materially" above inflation and productivity gains. Stating that "productivity has been high," Powell indicated that the Fed has no concerns at this point about a wage-price spiral.