Fed hints at early withdrawal of stimulus amid reports of stronger growth

Federal Reserve officials have hinted that they may need to withdraw their exceptional assistance from the economy sooner than planned, because of this year's stronger-than-expected growth.

The report of the Federal Open Market Committee's June 15-16 meeting gave only a few new insights into discussions on when the central bank should begin slowing the pace of its bonds purchases.

Some members suggested that the economic recovery was moving quicker than expected and was accompanied by an unexpected rise in inflation, both of which made the case for the Fed to ease up on policy.

The regulators continue to expect recent increases in inflation to be transitory, driven largely by constraints and shortages caused by the pandemic. However, several officials expressed worry that that inflation expectations “might rise to inappropriate levels if elevated inflation readings persisted,” according to the minutes.

The minutes showed, officials will intensify their talks on when and how to reduce asset purchases at their next meeting on July 27-28.

The committee kept short-term interest rates around zero at the meeting but also suggested that policy may be adjusted in the coming months.

The Federal Reserve's policymaking panel kept its benchmark rate fixed in a range of 0% to 0.25 %, which was in line with market forecasts.

Chairman Jerome Powell, though, suggested at his post-meeting press conference that committee members had conducted their first conversations about slowing the pace of the central bank's monthly bond purchases. As of today, the Fed is purchasing at least $80 billion in Treasury securities and $40 billion in mortgage-backed securities.

The objective of this guidance is to avoid the type of market reaction that occurred in 2013 when then-Chairman Ben Bernanke hinted the Fed may soon reduce its asset purchases. Investors mistook the Fed's plans to raise interest rates for speed, resulting in a one-percentage-point rise in the 10-year Treasury yield, called the "taper tantrum."

The meeting report was expected to give further information regarding committee members' thoughts on when the tapering might begin.

The minutes, however, added little to the public debate regarding the pace of asset purchases, suggesting simply that policymakers were talking about tapering, repeating what has become a common market phrase, but with little additional progress. Some members discussed the potential of lowering mortgage purchases before Treasury purchases, but no decision was made.

Along with leaving rates steady and without making any substantial moves on tapering, Fed policymakers raised their forecasts for economic growth and inflation.

The overwhelming impression, though, was that the current inflationary pressures will lessen in the coming months, but not before a 3.4 % increase this year.

These increased estimates assisted Fed policymakers in pushing their first-rate rise anticipation into 2023, while market pricing currently implies at least one increase in 2022.

According to last month's economic and interest-rate predictions, policymakers believe they will meet their overall targets "somewhat sooner than anticipated," Powell said at a press conference on June 16. The criteria for reducing bond purchases are still "a ways away," he added.

The labor market has been moving at a slower pace than expected since the last meeting in April.  Moreover, in June businesses added 850,000 jobs, the Labor Department reported last week 

With inputs from CNBC& WSJ

Picture Credits: Investopedia