By Yasin Ebrahim

Investing.com – The Federal Open Market Committee detailed plans to begin scaling back asset purchases later this month, with a view to ending its bond-buying program by June next year while holding interest rates steady.

The monthly bond purchases of $120 billion — $80 billion in Treasuries and $40 billion in mortgage-backed securities – would be trimmed by $15 billion a month.

Under the taper plans, the Fed will reduce monthly Treasury purchases by $10 billion and  mortgage-backed securities by $5 billion. This puts the Fed on target to stop bond-buying by 2022. 

Fed indicated that the Fed could alter the pace of bond-buying based on new economic data.

At the conclusion of its two-day policy meeting on Wednesday, the Federal Reserve kept its benchmark rate in a range of  0% to 0.25%. 

To cushion the economy against the effects of last year’s pandemic, the Fed recommenced its Financial Crisis-era bond buying, also known as quantitative easing, at the beginning of the epidemic. 

As the economy rebounded, the central bank set a bar of “substantial further progress” on inflation and the labor market that needed to be met to allow it  to begin removing or slowing some of its emergency stimulus, including quantitative easing. 

However, some critics of the Fed have suggested that it has been slow to lift its accommodative measures after an increase in inflation. 

Recently, the 10-year inflation breakeven (a crucial indicator of inflation expectations for the next 10 years) climbed to more than 3 year highs. According to the Fed’s latest updates, core personal consumption expenditures price inflation was 3.6%. That’s well above its 2% target. 

However, the Fed has adopted a new structure that will allow inflation to rise above its target. This is to compensate for inflation trends below target for many years. 

In a signal that market participants seem to have lost faith in the Fed’s ability to keep inflation running high for much longer they now price nearly three rate rises for 2023 according to Investing.com.

This is well in excess of Fed’s projected rate increase by the end 2022, or even early 2023. 

The bulk of the inflationary pressures have been driven up by wage pressures — as the supply of labor, or participation rate, has been slow to recover from the pandemic – and supply-chain issues increasing costs for both consumers and producers. 

At its September meeting the Fed reiterated the fact that high inflation is “largely reflecting transitory factor” and stated again that both the supply and demand imbalances as well as the supply bottlenecks will be greatly eased. 

Market participants should shift attention towards Fed Chairman Jerome Powell’s conference at 2.30 PM ET (1830 GMT). For more information on Fed’s plans to taper bond purchases, as well clues about Fed’s views regarding the direction of rate increases and whether inflation is affecting their view of the Fed’s position on this matter,  

“We believe Powell will stress once more that the Committee remains far away from its goals and, therefore, it is still far from meaningful discussions about raising interest rates.” Morgan Stanley In a note, (NYSE:) stated recently.