Fed Will Start Tapering Asset Purchases this Month

No change to the policy rate, but tapering will begin this month, says MIDF Research. After the November 2021 FOMC meeting, the US Fed maintained the Fed funds rate at the same level of 0.00-0.25%.

As widely expected, the FOMC finally unveiled its decision to begin tapering its asset purchases starting from this month. The FOMC participants agreed that pre-conditions for tapering have been met.

Necessary actions will be taken to keep inflation under control. In the press conference, Fed Chair Jerome Powell indicated that the current inflation reading is inconsistent with the Fed’s assessment of price stability.

If inflation goes out of control and feeds into higher inflation expectations, the Fed will stand ready to take the necessary actions to address to keep inflation close to its longer-term 2% target.

The resurgence of Covid-19 affected the pace of recovery. According to the FOMC, the US economy has been recovering benefiting from the vaccination progress and policy support.

However, the recovery has slowed in recent months due to the resurgence in Covid-19 infections. For example, retail sales rose at a slower pace of +13.9%yoy in Sep-21 (Aug-21: +15.4%yoy), while industrial production growth moderated to +4.6%yoy (Aug-21: +5.7%).

No change to fed funds rate for now. At this point, we foresee the US economy will continue to recover despite challenges from the supply constraints, tight labour market, and high inflation.

“With tapering is expected to complete by mid-2022, we foresee a higher likelihood for a potential rate hike in the latter half of next year. Until the tapering is done, Fed funds rate will be kept at the current ultra-low level.”