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The Federal Reserve Could Ease This Anti-Inflation Policy Before Cutting Rates

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Key Takeaways

  • After the Federal Reserve’s Open Market Committee meeting this week, Chair Jerome Powell said the central bank could ease quantitative tightening “fairly soon.”
  • Quantitative tightening is the practice of selling off securities or letting them mature in order to take money out of the marketplace and cool inflation.
  • Economists think the Federal Reserve could begin easing that practice before they cut rates.

Trying to predict what the Federal Reserve is going to do involves a lot of interpretation.

Wednesday’s post-FOMC announcement press conference gave Fed watchers a new riddle to ponder: When is “fairly soon?”

In his press conference Wednesday, Fed chair Jerome Powell gave that deliberately vague timeline for the central bank to start easing its quantitative tightening.

Quantitative tightening (QT) is one of the tools in the Fed’s anti-inflation playbook. When the pandemic hit, the Fed bought trillions of dollars worth of securities from financial markets, pouring money into the system and spurring activity to keep the economy afloat during the pandemic. After inflation flared up in 2021, they did the opposite, selling off those securities or letting them mature, taking money out of the marketplace to cool the economy and inflation.

Easing quantitative tightening would involve selling those assets—mortgage-backed securities and treasurys—at a slower pace than in recent months.

“While we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of runoff fairly soon,” Powell said at the Wednesday press conference. “The decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to project the ultimate level more gradually.”

Powell also said slowing the pace of tightening will reduce the possibility of stress on markets, hopefully helping to facilitate the soft landing the Fed has been looking for

Economists said Powell’s comments indicate the Fed may taper quantitative tightening—possibly as soon as their next meeting in May—before they cut their influential fed funds rate, which market participants don’t expect will happen before June. 

“We also keep our call for an announcement of tapering in May with an end to balance sheet runoff at year-end,” wrote economists at Bank of America after the meeting. “The risk to our view is that they start the rate cut cycle later and start taper later. Upcoming inflation data will be an important determinant of what comes next.”

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