Fed keeps US interest rates near zero, but will begin tapering asset purchases

HOUSTON (ICIS)–The US Federal Reserve said on Wednesday that it will keep interest rates at 0-0.25% but will begin to taper its level of buying of US Treasury and agency mortgage-backed securities.

The central bank noted that while the economy and employment continue to strengthen amid improvement in vaccinations rates and strong policy support, increased cases of the coronavirus over the summer has slowed the recovery in sectors most adversely affected by the pandemic.

The Fed continues to see high inflation, but also maintained its stance that the factors causing it are transitory.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the Fed said. “Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.”

The Fed said that since inflation persistently ran below 2%, they will aim to achieve inflation moderately above 2% for some time in order to achieve a 2% average over time and longer-term inflation expectations remain “well anchored” at 2%.

The central bank said progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation.

The Federal Reserve has a dual mandate to keep inflation under control and to encourage maximum employment.

TAPERING OF ASSET PURCHASES
The central bank said it will reduce its monthly pace of asset purchases by $10bn for Treasury securities and $5bn for agency mortgage-backed securities.

The Fed had been buying at least $80bn/month of Treasury securities and at least $40bn/month of agency mortgage‑backed securities. These will be reduced to $70bn in Treasury notes and $35bn in mortgage-backed securities later this month.

Beginning in December, it will reduce the purchases to $60bn and $30bn, respectively.

“The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” the Fed said.

Demand for plastics and chemicals tends to rise and fall at multiples of GDP. As a result, demand usually falls during recessions and rises during expansions.

Interest rates and other monetary policies can affect GDP by increasing or restricting the availability of credit to companies and households.

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