The Federal Reserve is not stepping on its economic brake. It is only easing off its big accelerator.
The central bank is widely expected to speed up its efforts to slow the American economy when it meets in the week ahead.
No, it won’t raise its target short-term interest rate. Rather, it likely will slow its monthly purchases of bonds even more. Since March 2020 the central bank has been buying tens of billions of dollars of US government and mortgage-backed bonds each month in its effort to bring down borrowing costs and help encourage spending. Through last month it purchased over $4 trillion of IOUs to stabilize nervous financial markets and boost confidence.
It worked. And so, in November, the Fed reduced its monthly appetite by 12.5 percent from its worst-of-the-pandemic buying. It is still making the purchases, just spending less money doing so.
On Wednesday, the bank’s interest rate setting committee is predicted to ease off even more. It will mark a faster effort to reduce its buying than it laid out just a few weeks ago. It also will be the Fed’s first explicit action in response to persistently high inflation.
As much as the bank’s monetary policies are about fulfilling its twin mandates — full employment and stable prices — they also are about fueling confidence that the Fed has the courage to act to head off sustained high inflation, even if it may mean the politically unfriendly action of hiking interest rates in an election year.
The Fed remains far from raising interest rates. But that time is approaching faster than thought earlier this fall. For now, it will focus on ending its bond-buying sooner than first planned. However, the bond market is moving up the odds of an interest rate hike sooner in 2022. The Fed committee releases its own forecast for its key interest rate as part of its meeting in the coming week.
It will make clear that what had been a patient Fed helping a pandemic-injured economy increasingly is growing anxious about inflation infecting the recovery.
