Fed Punts On Taper Timeline, Repeats View on Transitory Inflation: Stocks Extend Gains

The Fed Wednesday said it could begin tapering its $120 billion in monthly bond purchases if the economy continues to improve, but remained vague on its possible timing.

The Federal Reserve made no changes to its record low interest rates Wednesday, and signaled that if the economy continues to advance at its current pace, a tapering of its bond purchases would be warranted.

However, the Fed also noted that the recovery path remains dependent on the course of the coronavirus pandemic, suggesting it will continue to monitor incoming data prior to making a firm commitment to slowing the pace of its $120 billion in monthly asset purchases. 

The Fed said the Open Markets Committee was unanimous in its view that rates should remain at their record low range of between 0% and 0.25%.

"If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the Fed statement said. "These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses."

"In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook," the statement added. "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

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U.S. stocks traded extended gains following the Fed statement, with the S&P 500 up 55.6 points on the session and the Dow Jones Industrial Average rising 465 points. The tech-focused Nasdaq gained 175 points.  

Benchmark 10-year notes eased to 1.299% while the U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.05% higher on the session at 93.20.

The statement echoes comments Federal Reserve Chairman Jerome Powell during his keynote address to the Kansas City Fed's annual central bank symposium in August, when he said that there has been "clear progress toward maximum employment", adding he would be carefully assessing incoming data and the evolving risks."

"Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions," he added at the time.

"The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery," the Fed said Wednesday. "Inflation is elevated, largely reflecting transitory factors."

Inflation is running at the hottest levels since 2008, although August CPI cooled somewhat, to 5.3% from last year, as used cars prices eased and travel costs abated amid a renewed wave in Delta variant infections. So-called core inflation, which strips-out volatile components such as food and energy prices, rose 4.3% the highest since the early 1990s.