The Federal Reserve revealed Wednesday that it could start tapering asset purchases as early as the end of this year.
"Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal," the summary of the July Federal Open Market Committee meeting minutes stated.
U.S. stocks sold off following the release.
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The Fed cut interest rates to zero at the height of the coronavirus pandemic and began purchasing $80 billion a month in Treasury securities and $40 billion in mortgage securities in an effort to provide additional stimulus to the economy. In December, Fed officials said they would want to see "substantial further progress" toward meeting their goals of inflation around 2% and labor market conditions consistent with full employment.
While various officials said a reduction could come in the "coming months," others indicated that it would more likely become appropriate early next year, noting that the transitory nature of the year's rise in inflation, as well as the recent declines in "longer-term yields and in market-based measures of inflation compensation," cast doubt on the degree of progress that has actually been made toward the price-stability goal since December.
Some participants warned that the committee should be prepared to start tapering "relatively soon, in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated." In addition, committee members emphasized the importance of clearly reaffirming "the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate."
As for the economic outlook, officials said that "uncertainty was quite high" due to slowing progress on vaccinations, the spread of the delta variant and concerns over production bottlenecks and supply constraints. Some members also cited potential "upside risks" to inflation, such as supply disruptions and labor shortages potentially lingering for longer than anticipated and having larger or more persistent effects on prices and wages than assumed.