The Federal Reserve said Wednesday it will begin slowing the pace of its $120 billion in monthly bond purchases later this month, but made no mention of linking the so-called taper to future rate hikes.
The Fed will taper $15 billion from the monthly pace, with reductions in Treasury bond purchases of $10 billion in a further $5 billion cutback in purchases of mortgage-backed securities. Changes in the economic outlook, however, will give the Fed the power to "adjust the pace of purchases if warranted", the central bank said.
The Fed also kept its benchmark lending rate at a record low of between 0% and 0.25%, while maintain a pledge to keep it there unit a so-called "three part" test on employment and inflation is met.
At the signaled pace of tapering, the Fed would exhaust it total pandemic purchase program by June of next year, with Fed Funds futures now pricing in a 90% chance of a rate hike by July.
Fed Chairman Jerome Powell, however, said the Fed will be "patient" in terms of interest rate hikes, but would not hesitate to act if a response against faster inflation were needed.
"It’s been pretty clear that tapering was imminent, and though it was widely communicated, it marks the beginning of the end for the Fed’s highly accommodative stance," said Mike Loewengart, managing director, Investment Strategy at E*TRADE Financial. "What some may be questioning is the Fed is pretty much sticking to their knitting when it comes to their transitory view of inflation, as many feel higher prices are here to stay."
"But when you take a step back, the supply chain disruptions are a central culprit, an issue which likely won’t last forever," he added. "So perhaps we need to adjust our view of what transitory really means in terms of duration."
U.S. stocks improved from earlier levels following the Fed statement and press conference, with the Dow Jones Industrial Average rising 80 points on the session and the S&P 500 rising 23 points.
Benchmark 10-year Treasury note yields, meanwhile, rose 1 basis points to 1.573% while the dollar index slipped 0.13% to trade at 93.97 against a basket of its global currency peers.
"With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer’s rise in COVID-19 cases has slowed their recovery," the Fed statement read.
"Inflation is elevated, largely reflecting factors that are expected to be transitory," the statement continued. "Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors."
ISM data published earlier today showed activity in the U.S. services sector -- by far the most important component of economic growth -- surged to a record high of 66.7 points, even amid one of the worst labor shortages in several decades.
The 'prices paid' portion of the closely-watched benchmark rose more than 5 points to 82.9, the highest since September 2005, as shortages in everything from semiconductors to basic materials added to input costs.
In the meantime, the Fed's preferred inflation gauge held near the highest levels since the early 90s over the month of September, while wages continued to surge, with third quarter employment costs rising at the fastest pace in 39 years, according to the Labor Department's Employment Cost Index.