At the last meeting of 2021, the US Federal Reserve left interest rates constant in the range of 0.00-0.25% and gave important messages about the asset purchase program. The decline in the asset purchase rate, which was announced as a monthly reduction of 15 billion dollars in previous meetings, doubled in this meeting. In the statement made after the FOMC, 20 billion dollars in Treasury securities; Asset purchases will be reduced by 30 billion dollars in total on a monthly basis, including 10 billion dollars in mortgage-backed securities.
FED predicts 6 interest rate increases in two years
Expectations on the dot-plot chart, another highly anticipated issue at the FED’s last interest rate meeting of 2021, have also been updated. The chart, which gives clues about the FED’s interest rate moves in the coming years, reveals three interest rate increase expectations for 2022 and 2023. In the charts, the interest rate increase expectation for 2024 was announced as 2.
Powell’s tapering message turned into concrete steps
FED President Jerome Powell changed his rhetoric after the increase in inflation continued and spread more generally. Powell, who made statements in recent meetings that the pace of asset purchases would be gradually reduced, gave the message that ‘they may increase the tempo of tapering in asset purchases in recent weeks’. These messages of Powell turned into concrete steps and the tapering speed was doubled.
Powell cited the disappearance of thoughts that inflation was temporary as the reason for his change of heart on tapering. He argued that since inflation had been above 2% for a very long time, his temporary statements about inflation no longer reflected the facts. As a matter of fact, November inflation in the USA climbed to 6.8%, the highest level in the last 39 years in the country’s history.
What does it mean for the FED to reduce asset purchases?
In order to provide the cash increase that the markets will need during the pandemic period, the FED implemented an asset purchase policy in addition to interest rate cuts. In other words, it was purchasing treasury securities and similar financial assets in the market within a determined program (120 billion dollars per month) and injecting the cash it needed into the market through this channel. However, the most important expected effect of the abundance of money in the market was that prices began to increase, that is, inflation began to rise. When the highest inflation in US history since the last quarter of the 1900s was observed, the FED’s reduction in asset purchases came to the fore. As a matter of fact, the FED’s decision to increase the pace of reduction in asset purchases announced this month can be considered as a step that will support the reduction of inflation.
FED revised its economic expectations
The FED also revised its projections regarding the economy. Accordingly, the 2021 growth expectation, which was announced as 5.9% in September, was reduced to 5.5%. The growth expectation for 2022 was increased from 3.8% to 4%. The 2023 growth forecast was reduced from 2.5% to 2.2%. There were upward revisions in inflation expectations; 2021 inflation expectation increased from 4.2% to 5.3%. The expectation for this data for 2022 was increased from 2.2% to 2.6%.
