The Federal Reserve has announced intentions to stop injecting billions of dollars into the economy during the epidemic.
The US central bank has been buying $120 billion in bonds every month since the onset of the Covid crisis to keep borrowing prices low.
Jerome Powell, the chairman of the Federal Reserve, predicted that economic growth will pick up in the second half of the year.
He did say, though, that the Fed “can be patient” when it comes to rising interest rates.
Following a two-day meeting of the committee that sets Fed policy, Mr Powell said that the Fed’s purchases of Treasuries and mortgage-backed securities will be reduced by $15 billion this month.
As a result of the vaccination rollout, businesses, restaurants, schools, and workplaces have reopened across the United States.
However, firms are failing to satisfy surging demand due to supply chain issues and employee shortages, and prices are rising at their fastest rate in thirty years.
Mr Powell stated that there have been “significant price rises in some industries,” with inflation at 4.4 percent in September “far over” the Fed’s target of 2 percent.
The typical reaction to increasing inflation is a hike in interest rates, which dampens demand.
Mr Powell, on the other hand, reiterated his belief that price increases were only transitory, stating that while he expected higher inflation to last “far into next year,” it would begin to decline by the second or third quarter.
Since the worst of the epidemic has passed, customers in the United States have been spending more, including money saved during the lockdowns. However, many businesses are still having difficulty finding qualified employees, items have been detained at ports, and delivery have been hindered due to a scarcity of truck drivers. A shortage of some components, such as computer chips, has occurred.
As a result, food, building supplies, secondhand automobiles, household goods, and furniture cost more in the United States.
The shift in tone from the Federal Reserve, according to Richard Flynn, UK Managing Director at Charles Schwab, will reassure markets that the Fed will keep inflation under control.
“The Fed will hope that gradually phasing out its stimulus program would reduce demand, allowing supply to catch up.
He did say, though, that neither withdrawing the stimulus nor boosting interest rates were likely to help supply chain bottlenecks.
Principal Global Investors’ chief global strategist, Seema Shah, concurred, saying: “Because supply chain constraints are outside the Fed’s control, inflation is also beyond the Fed’s control.
“However, inflation will remain elevated for longer, inflation expectations are rising, and the employment shortfall is due to labor supply rather than labor demand, so there are limitations to what the Fed can actually achieve by holding policy rates steady for such a long time.”
She went on to say that the financial markets were still quite focused on when interest rates might rise.
The Federal Open Markets Committee (FOMC), which determines monetary policy, stated that it expects to continue to adjust bond market support at the same pace each month, implying that support will be completely removed by June 2022.
Mr Powell has stated that interest rates would not rise until the reduction of assistance is complete.
However, he stated that the schedule for decreasing support will be adjusted according to economic conditions.
Goldman Sachs macrostrategist Gurpreet Gill said the policy to begin cutting support was expected, but the range of possible consequences remained wide.
“Large shocks in the pandemic’s progress, inflation, inflation expectations, or wage growth might trigger a change in the taper speed and alter the rate forecast,” she added.
Mr Powell is awaiting word from President Biden on whether he will be nominated for a second term as chairman of the Federal Reserve. Some on the Democratic Party’s left have called for his resignation.