U.S. stocks rallied to new highs after the U.S. Federal Reserve announced that it will begin reducing the pace of its monthly bond purchases, pulling back on the massive amount of stimulus that it provided to the American economy during the pandemic.
Tapering of bond purchases will start “later this month” the policymaking Federal Open Market Committee said in its post-meeting statement yesterday (November 3). The process will see reductions of $15 billion U.S. each month – $10 billion U.S. in Treasuries and $5 billion U.S. in mortgage-backed securities – from the current $120 billion U.S. a month that the Fed is buying.
The committee said the move came “in light of the substantial further progress the economy has made toward the Committee’s goals since last December.”
The statement, approved unanimously, stressed that the central is not on a pre-set course and will make adjustments to the process if necessary.
The move was in line with market expectations following a series of Federal Reserve signals that it would begin winding down a program that began in March 2020 as a response to the pandemic.
Markets reacted positively, with stocks turning positive and government bond yields inching higher. Both the S&P 500 and Dow Jones Industrial Average moved higher and closed an new all-time highs following the Fed’s bond tapering announcement.
Along with the move to taper, the Fed also altered its view on inflation, acknowledging that price increases have been more rapid and enduring than central bankers had forecast but still referring to it as “transitory.”
“Inflation is elevated, largely reflecting factors that are expected to be transitory,” the statement read. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”
In a press conference, Federal Reserve Chairman Jerome Powell said he expects inflation to keep rising as supply issues continue and then start to pull back around the middle of 2022.
The statement also noted that the U.S. economy is expected to continue improving, particularly after the supply chain issues are resolved.
The Fed voted not to raise interest rates from its current level near zero, a move also expected by stock markets.
On the current schedule, the reduction in bond purchases will conclude around July 2022. Officials have said they don’t envision rate hikes beginning until tapering is finished, and projections released in September indicate one increase at most coming next year.
Inflation has been running at a 30-year high, pushed by a clogged supply chain, high consumer demand and rising wages that have stemmed from a chronic labor shortage.