Wednesday saw the Federal Reserve announce that it will soon begin to slow down its monthly bond purchases. It is the first step toward reducing the huge amount of support it provided the markets and economy.

In its post-meeting statement, the Federal Open Market Committee stated that bond purchases will be tapered “later in the month”. The process will see reductions of $15 billion each month — $10 billion in Treasurys and $5 billion in mortgage-backed securities – from the current $120 billion a month that the Fed is buying.

According to the committee, the decision was made “in view of substantial additional progress that the economy has made towards the Committee’s goals from last December.”

Unanimously approved, the statement stated that the Fed does not follow a set course. It will, however, make any necessary adjustments.

The committee stated that it believes similar monthly reductions in net asset purchases are appropriate. However, the Committee is open to adjusting the pace of purchases in response to changes in economic outlook.

Markets had been expecting the Fed to end its March 2020 program, which was accelerated as a result of the Covid pandemic.

The markets responded positively with stocks reducing losses and rising yields on government bonds.

The Fed did not change its views on inflation with the taper move. It acknowledged that prices have risen faster than the central bankers predicted, but it didn’t abandon the use of “transitory” as a term.

According to the statement, “Inflation has risen significantly and is largely due to factors which are likely temporary.” Large price increases have occurred in certain industries due to supply and demand issues resulting from the pandemic, and the reopening the economy.

Many market participants expected the Fed’s withdrawal of transitory language due to the continued inflation gains.

Paul Ashworth, Chief U.S. Economist at Capital Economics, wrote, “The Fed announced its QE taper this morning, as widely predicted, but still insists that inflation surge is ‘largely’ temporary, which suggests that the doves still hold the upper hand.”

Jerome Powell, Fed chairman, stated that he expected inflation to continue rising as supply problems continue. Then it will start to fall around 2022.

He stated that “our baseline expectation is supply chain shortages and bottlenecks will continue well into next year, and high inflation as well.” As the pandemic supplies decrease supply chain bottlenecks will subside and growth will rise, inflation will drop from current elevated levels.

In the statement, it was also stated that economic growth is possible after supply chain problems are addressed.

The committee stated that “progress in vaccinations, as well as an ease in supply constraints are expected support continued gains economic activity and employment as the result of a decrease in inflation.”

Markets also anticipated that the FOMC would not raise interest rates.

Investors should not interpret a decrease in purchases as an indication that rates will rise.

According to the current plan, bond purchases will be reduced starting in November and ending around July 2022. Officials claim that rate hikes will not begin before tapering ends. September’s projections suggest that only one more increase is possible next year.

However, markets have become more aggressive with pricing and at one time indicated as much as three additional increases for next year. This sentiment is now less prevalent as Wall Street anticipates a Fed that will be more cautious as it attempts to manage slowing growth and increasing inflation.

The clog in the supply chain, rising consumer demand, and a labor shortage have all contributed to inflation running at an unprecedented 30-year high. Although the Fed maintains that inflation will return to their target of 2% eventually, they now admit that this could be a longer process.