Fed Signals Asset Purchases Could End by Mid-2022

Under plans discussed last month, the Fed would taper its $80 billion in monthly Treasury purchases by $10 billion a month, and it would reduce its $40 billion in mortgage-backed securities purchases by $5 billion a month, the minutes said.

That schedule for phasing out the Fed’s stimulus program is somewhat faster than investors had anticipated just a few months ago, and it partly reflects how this year’s surge in inflation is proving more persistent than central bank officials and private-sector economists anticipated.

Some Fed officials have been eager to conclude their asset buying to get flexibility to raise rates next year, if needed, because they think inflation may continue to run above the Fed’s 2% target. The minutes said that several participants at last month’s meeting preferred to reduce the purchases even faster. Officials don’t want to be in a position where they feel compelled to raise rates at a time when they are still fueling the monetary stimulus by purchasing assets.

“The committee could adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected,” the minutes said.

New projections released at the end of that two-day meeting showed half of the 18 officials that participated expected the economy to require an interest-rate increase by the end of 2022. In June, just seven officials anticipated raising rates next year. The projections also showed several officials expected somewhat higher inflation next year than in June, and nearly all penciled in more rate increases in 2023.

The Fed’s postmeeting statement last month included language “to put notice out” that a reduction in bond buying “could come as soon as the next meeting,” Fed Chairman Jerome Powell said at a Sept. 22 news conference.

Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December has produced a recovery like none in recent memory. Inflation has soared this year, with so-called core prices that exclude volatile food and energy categories up 3.6% in August from a year earlier, using the Fed’s preferred gauge. The gains largely reflect disrupted supply chains, shortages of labor and materials and a rebound in travel associated with the reopening of the economy.

The Labor Department reported Wednesday that a separate index of core inflation rose 4% in September from a year earlier, matching the year-over-year increase reported in August. Overall consumer inflation had in recent months risen at the fastest pace in 13 years, according to the Labor Department.

The Fed cut its short-term benchmark rate to near zero when the coronavirus pandemic hit the U.S. economy in March 2020, and it has been purchasing at least $80 billion a month in Treasury bonds and $40 billion a month in mortgage bonds since June 2020 to provide additional stimulus.

Mr. Powell said last month many officials thought the bond-buying program could end by the middle of next year, a somewhat faster time frame than the Fed’s other experience with tapering a similar asset-purchase program in 2014. “I think this will be a shorter period,” he said. “The economy’s much farther along than it was when we tapered” in 2014.

Fed officials laid out a three-part test to raise interest rates one year ago that would require inflation to reach 2% and be on course to exceed that while the labor market returns to levels consistent with maximum employment.

In December, officials said they would buy bonds at the current pace until the economy had made “substantial further progress” toward their goals of reversing a shortfall then of around 10 million jobs since the start of the pandemic and moving inflation back to their 2% goal over time. The Fed’s asset portfolio has doubled to $8.4 trillion from $4.2 trillion in February 2020.

Mr. Powell indicated in August that most officials thought they had met their inflation progress test for tapering asset purchases, leaving the employment shortfall as the remaining hurdle. The economy has added around 4.9 million jobs through September—closing about half of the shortfall that existed in December. The Labor Department reported last week that the unemployment rate in September had fallen to 4.8%, down from 5.2% in August and 5.9% in June.

For the labor-market goal, “I guess my own view would be that the test…is all but met,” said Mr. Powell.

Write to Nick Timiraos at [email protected]