Fed to rein in stimulus measures this year

The US Federal Reserve is expected to outline its plan for reining in the wave of stimulus measures it launched in response to the Covid crisis this week.

Experts are anticipating the Fed will formally recognise its intentions to reduce the pace of its bond buying programme this year after it concludes its rate setting meetings on Wednesday.

The Fed ramped up its bond buying programme to dampen the economic shock of the Covid crisis, buying $120bn of assets each month, made up of US Treasuries and mortgage backed securities. 

The Federal Open Market Committee (FOMC) is expected to provide guidance on the fate of the stimulus programme on Wednesday.

“At the upcoming FOMC meeting, we expect the policy statement will update the forward guidance on asset purchases—taking another step closer to tapering—by essentially replacing the “in coming meetings” language with “this year”,” think economists at NatWest.

Diane Swonk, chief economist at accountancy firm Grant Thornton, urged the Fed to set out the tapering plan as soon as possible to ensure financial markets can adjust before it happens.

Last month, chair Jerome Powell said conditions to start tightening policy are close to being met. However, stressed there needed to be more progress in the US jobs market before any tightening could happen.

A weak August jobs report, which showed the American economy added just 235,000 jobs, coming in much below economists’ expectations, may prompt Powell to announce tapering will begin in December as opposed to November.

New projections for the US economy, inflation and possible rate rises will be published on Wednesday. Analysts expect the Fed’s forecasts for GDP growth to be revised down from June’s set of projections, partly triggered by the rapid spread of the Delta variant and supply chain snarl ups hitting the economy.