Taper Time

The Federal Reserve today announced the (much-overdue) start to tapering, which means it will continue to increase the size of its balance sheet, but not quite as fast. Starting later in November, the Fed will reduce its monthly pace of asset purchases to $105 billion per month from the current rate of $120 per month. In particular, the Fed will reduce Treasury purchases to $70 billion per month from $80 billion, while reducing mortgage-backed securities purchases to $35 billion per month from $40 billion. And the Fed expects to keep tapering Treasury securities by a further $15 billion per month (in the same proportions) starting in December. At this pace, tapering would conclude in June of 2022, just in time for the market-implied first rate hike in July of next year.

Beyond the wording changes to the Fed statement to announce the tapering timeline, there were also changes reflecting updated views on the economic front. For example, the Fed noted an additional tailwind for future activity as "an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation."

It's also worth noting that the Fed tempered its "transitory" inflation talk. In September, it had little doubt that the drivers of inflation would be temporary, stating the higher prices were "largely reflecting transitory factors." Today's statement hedged that comment, stating these factors are now "expected to be transitory." In other words, their confidence that inflation pressures will ease any time soon is waning.