Bond Tapering Amid Rising Inflation

The new COVID-19 strain remains a threat. However, Federal Reserve Chair Jerome Powell said policymakers might consider eliminating pandemic assistance at a faster rate. He discarded the term “transitory” to characterize stubbornly high inflation.

Financial markets saw his statements Tuesday before the Senate Banking Committee. Both Democrats and Republicans expressed alarm about high prices. The hawkish tilt might result in interest rate hikes sooner than expected next year. “I believe it is acceptable for us to examine at our next meeting, which is in a couple of weeks if it will be appropriate to wind up our acquisitions a few months early,” said Powell. Powell was re-elected to a four-year term by President Joe Biden last week. “We’ll gather additional data and learn more about the new variety in those two weeks.”

According to a plan unveiled at the beginning of November to cut asset purchases by $15 billion per month, the US central bank would conclude its asset-purchase program in mid-2022. The policy-making Federal Open Market Committee will meet on December 14-15. They may decide to speed up the tapering process.

Traders react to the tapering

As investors absorbed the speech, stocks tumbled, and the US Treasury yield curve flattened. Officials from the Federal Reserve have stated repeatedly that they intend to complete the taper before raising borrowing prices from near zero, where they have been since the outbreak in March 2020. On the heels of Powell’s remarks, traders increased their wagers on how soon the Fed will hike rates.

Governor Christopher Waller and Fed presidents Mary Daly of San Francisco and Raphael Bostic of Atlanta have all stated that if economic indicators remained solid, they might consider speeding up the tapering process.

The hearing’s bipartisan support for tougher action on inflation offered Powell political cover to speed up the taper ahead of a vote on his second term as Fed chair. The statements signal an uncommon shift in his tenure after the FOMC set the current cutting rate just a few weeks ago. This indicates that the Fed is becoming increasingly concerned about recent price hikes’ “transitory” character. ” It’s time to put that term to rest and try to explain what we mean more clearly,” Powell added.