Federal Reserve to Scale Back Bond Buying, Signal Future Rate Hikes

Strategic Insights -

The Federal Reserve is set to announce a scaling back of its bond-buying stimulus, a move that indicates the US economy has largely recovered from the COVID-19 recession. However, the Fed's efforts to curb inflation through rate hikes may be complicated by rising prices and slowing growth. Economists warn that aggressive rate increases could lead to higher borrowing costs for consumers, while the Fed's decision to maintain its zero interest rate near zero until full employment and 2% inflation goals are met suggests a higher bar for rate hikes.

Key Takeaways:

  • The Federal Reserve will likely scale back its bond-buying stimulus, a move that indicates the US economy has largely recovered from the COVID-19 recession.
  • The Fed's potential rate hikes may be complicated by rising inflation and slowing growth, with economists warning of potential higher borrowing costs for consumers.
  • The Fed will continue to buy $80 billion a month in Treasury bonds and $40 billion in mortgage-backed securities until substantial further progress is made toward its goals of full employment and 2% inflation.
  • The unemployment rate has fallen to 4.8% from 6.7% in December, although it remains above the pre-pandemic level of 3.5%.
  • The Fed's Chair, Jerome Powell, emphasized that inflation has been met and progress has been made toward full employment, but Powell also stressed that the end of bond purchases does not necessarily mean the start of rate hikes.
  • Economists expect the Fed to taper down the Treasury and mortgage bond purchases by $10 billion and $5 billion, respectively, each month, starting in November, with the bond buying potentially ending next June.
  • The Fed will maintain its key interest rate near zero until the economy returns to full employment and inflation has risen above its 2% goal "for some time."
  • The Fed funds futures markets predict two rate hikes next year and as many as three in 2023, although a September Fed meeting predicted no more than one rate increase next year.

Statistics:

  • $80 billion: The amount the Fed buys in Treasury bonds each month.
  • $40 billion: The amount the Fed buys in mortgage-backed securities each month.
  • 4.4%: The annual inflation rate, according to the Fed's preferred measure.
  • 4.8%: The current unemployment rate.
  • 6.7%: The unemployment rate in December.
  • 3.5%: The pre-pandemic unemployment rate.
  • 1.56%: The current 10-year Treasury yield.
  • 0.93%: The 10-year Treasury yield late last year.
  • 3.14%: The current average 30-year fixed mortgage rate.
  • $3.40: The current average price for a gallon of regular unleaded gas.
  • $4.59: The average price of unleaded gas in California.

Sources:

  • Paul Davidson, USA TODAY
  • Jerome Powell, Federal Reserve Chair
  • Kathy Bostjancic, chief U.S. financial economist for Oxford Economics
  • Morgan Stanley
  • Barclays