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Fed Chair Jerome Powell Provides Clearer Timeline for Tapering Asset Purchases

While interest rates are staying near-zero, the Federal Reserve is moving forward with plans to start tapering its $120 billion in monthly asset purchases before the end of the year. 
Many had expected Fed Chair Jerome Powell to clarify the timing of the long-anticipated taper following Wednesday's meeting of the Federal Open Market Committee (FOMC), and he didn't disappoint. 
"If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," said the committee's post-meeting statement. 
"These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses." 
Powell, who first said the taper was coming in 2021 at the annual Jackson Hole Symposium in August, said that "soon" in this case could mean at the next FOMC meeting in November. 
"That's the purpose of that language is to put notice out that that could come as soon as the next meeting," he said. 
The Fed started these monthly purchases at the beginning of the pandemic to stabilize financial markets rocked by the global shutdown. 
Many have argued that asset purchases, which are also known as quantitative easing, are long past their expiration date, as financial markets have ballooned during the pandemic despite the economic impact of COVID, which continues to ripple through supply chains and labor markets.
"The idea behind those asset purchases was to keep credit markets functioning and to ensure the flow of credit to consumers and businesses," said Tom Kozlik, head of strategy and credit at HilltopSecurities. "It succeeded in that, but it succeeded at that about a year and five months ago. It does kind of beg the question of why exactly you're still buying $120 billion dollars a month in bonds."
Michael Lee, analyst and founder of Michael Lee Strategy, said any justification for tapering now was also true earlier in the pandemic once capital markets found their footing. 
"I think quantitative easing plays a role in the heart of a crisis," he said "It's extraordinarily useful to stabilize capital markets. As soon as you leave a crisis, it does nothing for the overall economy."
At the Fed, however, there has been more concern about reducing COVID-related stimulus too soon than potentially overdoing it. Powell, for his part, said the central bank is getting closer to meeting its threshold of "substantial further progress"  on inflation and employment.  
"The test for beginning our taper is that we've achieved substantial further progress toward our goals of inflation and maximum employment," he said.  "And for inflation, we appear to have achieved more than substantial further progress, so that part of the test is achieved in my view and in the view of many others. The question is really on the maximum employment test."
Powell said that some members of the committee think the test for employment has been met, while others would like to see more progress before shifting the policy. "I guess my own view is that the substantial further progress test for employment is all but met," he said. 
Some analysts were predicting that factors such as debates in Congress over the federal debt ceiling and the debt crisis impacting one of China's biggest property developers, Evergrande, would test the Fed's resolve to start tapering. But Powell and other Fed officials have said they are staying the course as long as broad economic improvement continues. 
That gives the Fed a couple of more months of economic data before making its decision. 
As for interest rates, Powell has said previously that hikes won't come until after tapering, but many are still wondering if a rate liftoff is on the horizon. 
The latest so-called dot plot — the chart in the FOMC's post-meeting projections showing individual members' forecasts for when they expect interest rate increases to take place —  has complicated Powell's efforts to disentangle tapering from rate increases. 
Half of FOMC participants now see interest rate hikes of at least 1 percent in 2022, compared to seven officials in the June statement. This suggests the committee is shifting up its expectations for an increase, even as it lowers expectations for GDP growth and employment in 2021. 
However, some experts argue that the headline-grabbing dot plot should be ignored because it's constantly shifting based on the most recent economic data and news, rather than more rigorous long-term projections.  
"I don't pay attention to the dot plot anymore," Lee said. "In my mind, it's a useless tool."
Powell himself has expressed that the dot plot should be taken with a grain of salt. 
"The rate hike decision is one that's done by committee, whereas the dot plot is based on individual projections and subject to change," said Greg McBride, chief financial analyst for Bankrate. "[Powell's] really tried to downplay the significance of the dot plot." 
On broader economic trends, the FOMC predicted slightly slower growth for the rest of 2021. It forecasts a GDP increase of 5.9 percent this year, compared to its 7 percent forecast in June, while forecasting that unemployment will stand at 4.8 percent by end-of-year, compared to the 4.2 percent predicted in June. 
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