The Federal Reserve is inching toward beginning to pull back its extraordinary support of the U.S. economy as it nears its goals to taper asset purchases and the recovery continues.
The central bank on Wednesday announced it would hold interest rates steady at near-zero, as widely expected.
But the Federal Open Market Committee took a step toward slowing its $120 billion-a-month pace of U.S. Treasury and agency mortgage-backed securities purchases, hinting that the time to “taper” those purchases could come sometime “in coming meetings.”
“It's not timely for us to be thinking about raising interest rates right now,” Fed Chairman Jerome Powell told members of the press Wednesday. “What we’re doing is we’re looking at our asset purchases and judging what is right for the economy.”
The Fed’s test for when to taper is “substantial further progress” in the central bank’s dual mandate of maximum employment and stable prices.
Powell said the Fed has “some ground to cover” on specifically the labor market, where the employment level is still 6.8 million jobs short of where it was pre-pandemic. But the Fed chief said that the jobs picture is still improving, adding that “it shouldn’t take that long” to return to a strong labor market even in the face of the Delta variant of COVID.
“I will say: we’re making progress,” Powell said broadly. “We expect further progress and we expect that if things go well, then we will reach that goal. And when we reach it — and the committee is comfortable that we have reached it — then we’ll taper at that point.”
Headed into today’s FOMC decision, many Fed watchers are forecasting the Fed to wait until November or December this year to officially announce a tapering program.
How to taper?
Although Powell was mum on the details of how the Fed would time its taper, he offered some clues as to the mechanics of paring back its so-called quantitative easing program.
Currently, about $80 billion a month of its monthly buys are in U.S. Treasuries, whereas $40 billion a month are in agency mortgage-backed securities (MBS).
Some Fed officials ready to begin the taper talk are showing signs that they’d prefer a steeper tapering of its MBS purchases compared to its U.S. Treasury purchases. One reason: the optics of supporting the MBS market through a hot housing market.
In response to a question from Yahoo Finance, Powell said he feels that Treasury and MBS purchases are affecting financial conditions “in very similar ways.”
“There may be modest differences in terms of contributions to housing prices but it's not something that’s big,” Powell said.
Still, Powell said the committee discussed the possibility of tapering its MBS purchases differently than its Treasury purchases, noting that there was “little support” for a staggered timeline where it tapers MBS before Treasuries.
“I think we will taper them at the same time,” Powell said. “It seems likely, based on where people are now. The idea of reducing MBS purchases at a somewhat faster pace than treasuries does have some attraction for some people — others not so much.”
Powell said those discussions will continue in coming meetings.
Fed watchers will now turn their attention to the central bank’s annual Jackson Hole Symposium, scheduled for August 26 to 28. The Fed’s next scheduled policy-setting meeting will take place roughly a month after that, on September 21 and 22.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.