Fed keeps interest rates unchanged but reaffirms plans of early bond tapering

The US Federal Reserve kept the benchmark interest rates near zero and assured the market that the current pace of asset purchases would be maintained, but hinted that the interest rates could be hiked sooner than expected.

The Federal Open Market Committee (FOMC) officials indicated that they would initiate the pull back on some of the stimulus provided by the central bank during the pandemic-induced financial crisis but did not reveal a specific date.

“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the FOMC’s post-meeting statement said.

The Federal Reserve’s dot plot of projections showed that nine of the 18 FOMC members expected a rate hike in 2022.

The dot plot is a visual projection of the forecast of the members of the committee, drawn every quarter, on where interest rates will go in the short, medium, and long term. The new projection is up from seven in June’s Fed projections.

Fed Chairman Jerome Powell maintained his stance that the Fed’s bond-buying program would witness tapering by the end of 2022. He announced, “Participants generally view, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”

He reiterated that the start and pace of the Fed’s asset purchases “will not be intended to carry a direct signal regarding the timing of interest rate liftoff.”

At the Fed’s annual Jackson Hole meeting, Powell had said that the Fed would taper down its $120 billion monthly asset purchase program by the end of this year.

Commenting on the Federal Reserve official trading controversy, Powell said that said he was previously “not aware” of the details of the trading activity of some regional Fed presidents and the central bank would review the ethics policy surrounding trading by Fed officials.

Financial disclosures filed by the Fed’s 12 regional bank presidents came under scrutiny two weeks ago after it was revealed that some had traded frequently throughout 2020, while others held million-dollar positions without material changes to their portfolios.

In a bid to calm down fears surrounding the ripple effect created by the Evergrande crisis, Powell said that it would not pose a major risk to U.S. or China banks. “The Evergrande situation seems very particular to China, which has very high debt for an emerging market economy. You would worry that it would affect global financial conditions through confidence channels and that kind of thing, but I wouldn’t draw a parallel to the United States corporate sector,” he said.

Wall Street was largely happy with the Federal Reserve’s decision to continue its bond-buying program and near-zero interest-rate scheme to support financial markets and the economy, for now.

Following Powell’s statement, the Dow closed higher by 338.48 points, or 1%, closing at 34,258.32, in a positive day for the market. The S&P 500 and Nasdaq Composite each rose roughly 1%, with the S&P 500 closing at 4,395.64, and the Nasdaq finishing at 14,896.85.

The Dow and S&P 500 recorded their largest daily percentage gains since late July, while the Nasdaq scored its best session advance in about a month, according to Dow Jones Market Data.

Picture Credits - Bloomberg/Getty Images