US Fed to rein in bond buying soon but keeps rates steady

The US Federal Reserve held rates at record lows today, but did formally recognise it will likely rein in bond buying this year.

The Federal Open Market Committee (FOMC) kept rates unmoved at 0-0.25 per cent, but said if the economy continues on a positive trajectory, it “judges that a moderation in the pace of asset purchases may soon be warranted.”

Half of the FOMC think rates will need to rise next year.

Fed chair Jerome Powell has stressed more progress needs to happen in the American jobs market before tapering can begin. The US economy added 235,000 jobs in August, much lower than expectations.

The Fed expects inflation to run at 4.2 per cent this year, more than double its target and a 0.8 percentage point hike to its previous forecast, while GDP forecasts were revised down.

The US economy has rebounded strongly from the pandemic, prompting policymakers and experts to assess the appropriateness of keeping policy ultra loose. 60 per cent of economists expect tapering to begin in December.

A resurgence in Covid-19 infections and a slowing services sector is weighing on the US’s growth prospects, while a deadlock among politicians over the debt ceiling is raising concerns the US may default.

The Fed unleashed a wave of stimulus measures to calm volatile financial markets and dampen the economic consequences of the Covid-19 crisis. It has been buying £120bn in debt each month.

The Fed’s accommodative policy has boosted financial markets. There are concerns borrowing costs could rise as the central bank pulls support from the bond market.