Fed Dials Back Covid Stimulus Again As Rapid Inflation Rattles Markets

Topline

The Federal Reserve will move more quickly to phase out pandemic-era stimulus measures it said as it concluded a two-day policy meeting Wednesday, a widely expected—but still concerning—move as investors and the central bank grapple with a decades-high surge in inflation.

Federal Reserve Chairman Jerome Powell speaks during a Senate Banking Committee hearing on Capitol … [+] Hill.


ASSOCIATED PRESS

Key Facts

In a Wednesday afternoon statement, the Federal Open Market Committee said it would keep the federal funds rate unchanged at between 0% and 0.25%, but reduce its monthly bond purchases by an additional $30 billion each month.

Officials led by Fed Chair Jerome Powell acknowledged supply and demand imbalances related to the pandemic have continued to contribute to elevated levels of inflation but said progress on vaccinations should help reduce the surge by year’s end.

The Fed forecasts about three interest rate hikes next year, one more than announced last month, and three more in 2023.

Stocks rose within minutes of the Fed\’s announcement, with the S&P 500 adding 0.2%, after falling nearly 2% from an all-time high set last week. 

At last month\’s policy meeting, the Fed announced it would begin tapering its $120 billion pandemic bond-buying program “in light of the progress the economy has made,\ reducing the purchases by $15 billion each month to phase them out completely by June.

Until then, the Fed had been buying $80 billion of Treasurys and $40 billion of mortgage-backed securities every month since June 2020 to help stimulate investment and spur the economy.

Key Background

​​Stocks retreated from record highs this week after last month\’s inflation reading showed the largest surge in consumer prices in nearly four decades, rattling investors ahead of the Fed\’s policy meeting. A majority of central bank officials—including Powell—have recently suggested that the central bank may have to speed up the tapering of its $120 million monthly bond-buying program in order to curb rising inflation, which could mean future interest rate hikes sooner than expected. “Stocks have been under pressure as many investors began to fear a trading life without a Fed safety net,” explains Oanda senior market analyst Edward Moya. “A rash of central bank rate decisions this week will likely show stocks will have to move higher without the help of central bankers.”

Tangent

Consumer prices rose 6.8% in the 12 months ending in November—the largest annual increase since June 1982, according to data released Friday by the Labor Department.

Further Reading

Dow Drops More Than 300 Points Ahead Of Fed Meeting, Tesla Sinks While Pfizer, Moderna Jump ​​(Forbes)

Inflation Spiked Another 6.8% In November—Hitting 40-Year High As White House Tries To Temper Price Concerns ​​(Forbes)