Bank of America projects the Fed will taper asset purchases in November, ahead of earlier projections of 2022

Jerome Powell
  • The Federal Reserve is likely to start reducing asset purchases in November, said Bank of America on Thursday.
  • BofA sees the Fed cutting down US bond buys by $10 billion to $70 billion in November.
  • The Fed's decision on tapering will be highly dependent on economic data with COVID-19 infections on the rise.
  • See more stories on Insider's business page.

The Federal Reserve is likely to begin reducing its purchases of Treasury bonds and mortgage-backed securities in November, Bank of America said Thursday, changing its outlook on the end of stimulus efforts spurred by the coronavirus pandemic.

The investment bank shifted its view to November from January 2022 following the release of minutes from the Fed's July meeting on Wednesday. The minutes suggested most members of the Federal Open Market Committee see the central bank on course this year to start reducing the emergency asset purchases put in place to help the world's largest economy weather the COVID crisis.

"September seems too early to start a taper since the minutes signaled FOMC agreement on providing 'advance notice' before making changes to balance sheet policy and may be too early to get a proper read on employment data since delta variant concerns emerged," said BofA in a note led by rates strategist Mark Cabana.

December seems unlikely considering the timing of when the Fed should announce its schedule of monthly purchases of US Treasuries and mortgage-backed securities.

"If the Fed indeed wants to start reducing purchases this year, November then seems the most likely timing," said BofA.

The central bank has been buying $80 billion worth of Treasury securities and $40 billion in mortgage-backed securities, or MBS, every month since June 2020 to help the world's largest economy recover from the coronavirus crisis that pushed it into a deep but short recession.

The Fed will likely reduce Treasury bonds buys to $70 billion in November and to $60 billion in January 2022 followed by gradual decreases until purchases hit zero in September 2022, the bank said.

MBS purchases are likely to go down to $35 billion in November and to $30 billion in January 2022 before also gradually stepping down to zero in September of next year.

But any decision on tapering will be highly conditional on the flow of economic figures, said the rates strategists and economists.

"With the recent rise in COVID cases, the Fed will be monitoring the incoming data closely to make sure that the economy continues to make 'substantial further progress' towards its dual mandate (especially on employment) before announcing any changes to its asset purchase program."

That means even more scrutiny on upcoming US nonfarm payrolls reports. The bank sees a risk of a disappointing jobs report for August in part because of concerning signs among small businesses and potential weakening in the service sector because of the highly transmissible Delta variant of coronavirus. The US jobs report is due in early September.

BofA said the Fed completing asset tapering by the end of the third quarter would give the central bank flexibility to raise interest rates by end of 2022 if they see that as an appropriate move. Policy makers last year cut interest rates to a target of 0% to 0.25% to reduce borrowing costs.

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