Fed Signals ‘Taper’ Coming Soon, Indicates Rate Hike Could Come Next Year

The Federal Reserve said that a reduction of the size of its monthly bond purchases may “soon be warranted” if the economy continues to progress as expected and the forecasts of Fed officials moved the first rate hike forward from 2023 to 2022.

Indicators of economic activity and employment have continued to strengthen, the Fed said in a statement at the conclusion of its two-day meeting. The Fed credited this strength to progress on vaccinations and “strong policy support.”

The Fed has been buying at least $80 billion of Treasuries and $40 billion of mortgage-backed securities each month. Last December, the Fed said it would continue the program until “substantial further progress” had been made toward its legally prescribed goals of maximum unemployment and price stability.

The Fed’s statement on Wednesday appeared to indicate that the Fed expects to hit that point in the near term. Many Fed watchers think the Fed will begin reducing bond purchases after its November or December meetings, with the balance of analysts on the side of a November announcement. There is no meeting scheduled for October.

“Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” the Fed said.

As expected, the Fed left its overnight interest rate target pegged to zero to 0.25. The Fed is not expected to lift that rate until sometime after it has stopped purchasing bonds. Fed chair Jerome Powell has repeatedly emphasized that the conclusion of the bond purchasing programs will not automatically lead to rate hikes.

The projections of members of the Federal Open Market Committee, which sets monetary policy, show that the medium expectation is for no hikes in 2021, one hike in 2022. At the June meeting, the median projection in the so-called “dot plot” that tracks the anonymous forecasts of Fed officials had no hikes in 2022. Further out, the median forecast is for the target to rise to 1.0 in 2023, up from 0.6 at the June meeting. This was the first time the Fed released projections for 2024 and those show a median expectation of 1.8 by the end of that year.