Monetary Policy

The Fed Isn't Ready to Taper Yet


The Fed Isn't Ready to Taper Yet

Photograph by Win McNamee/Getty Images

Rate-setters at the Federal Reserve stood pat on their bond-buying and pointedly noted that today’s inflation rate is running lower than they want. “The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance,” the Federal Open Market Committee said. Balancing that bearish assessment, the FOMC (speaking of itself in the third person, as usual) said “it anticipates that inflation will move back toward its objective over the medium term.”

Traders and economists perused the Fed’s language for hints about when it might begin to cut back the $85 billion-a-month pace of purchases of long-term bonds, which it’s buying in an attempt to push down interest rates and get the economy growing faster. A Bloomberg News survey of economists found many expect the tapering might begin as soon as the Fed’s Sept. 17-18 meeting.

Interest rates rise when investors expect the Fed to reduce bond purchases. Today the yield jumped right after the government’s 8:30 a.m. report that the U.S. economy grew at an annual rate of 1.7 percent in the second quarter, faster than the 1 percent median prediction of economists surveyed by Bloomberg. That was taken as a sign that the economy was strong enough to grow without the Fed’s support. But after the Fed’s 2 p.m. statement, yields fell back to around 2.64 percent, just a little above where they started the day.

Before tapering, the Fed will “want more evidence that we’re approaching 2.5, 3 percent trend growth vs. the stall speed we’re currently at,” Richard Schlanger, a vice president at Pioneer Investments in Boston, told Bloomberg.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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