Federal Reserve may taper bond-buying program soon, rate hike…

Federal Reserve officials signaled they would probably begin tapering their bond-buying program soon and revealed a growing inclination to start raising interest rates in 2022.

If progress toward the Fed’s employment and inflation goals “continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the U.S. Central bank’s policy-setting Federal Open Market Committee said Wednesday in a statement following a two-day meeting.

The Fed 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.

Fed Chair Jerome Powell will hold a virtual press conference at 2:30 p.m. In Washington to discuss the U.S. Central bank’s first steps toward withdrawing emergency pandemic support for the economy.

His performance will be 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.

“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 rose slightly, while yields on 10-year Treasuries maintained an earlier decline. The dollar remained lower after the decision.

New projections

The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%, and continue purchases of Treasuries and mortgage-backed securities at a pace of $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% by the end of that year. The median for 2023 rose to 1%, from 0.6% in the June projection.

Other forecast takeaways (median estimate):

FOMC median projection for 2022 inflation rose to 2.2% from 2.1% in June; held the 2023 forecast at 2.2%

Unemployment 3.8% 2022, 3.5% 2023; no change from June forecast

GDP growth seen at 3.8% in 2022, 2.5% 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 $160 billion daily.

The U.S. Unemployment rate fell to 5.2% in August, well below the April 2020 peak of 14.8%. But it’s still above the 3.5% 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% in the 12 months through July, well above the central bank’s 2% target. Many Fed officials have said they expect it to return to around 2% 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.

—With assistance from Ana Monteiro.