As was widely expected, the Fed voted unanimously to keep its target interest rates unchanged, but to begin the process of slowing/tapering its monthly asset purchases.

After growing its balance sheet from $4.1t to $8.4t since the onset of the pandemic, the Fed announced that it will begin slowing its $120bln in monthly purchases by $15bln per month, beginning this month. Monthly Treasury purchases will initially be slowed from $80bln to $70bln and MBS purchases from $40bln to $35bln.

In December, purchases will then be slowed to $60bln and $30bln, respectively. If the $15bln per month taper continues in that fashion, purchases will conclude in June 2022 with the balance sheet at $8.8t. The Official Statement provides policymakers with flexibility, noting that the Committee "is prepared to adjust the pace of purchases if warranted by changes in the economic outlook."

The persistence of higher-than-expected inflation led officials to provide a slightly less certain inflation assessment in the Official Statement. The previous Statement noted that "Inflation is elevated, largely reflecting transitory factors." This was changed to say, "Inflation is elevated, largely reflecting factors that are expected to be transitory" (emphasis added). However, while the Committee is less certain, they continue to believe it will prove transitory.

As it relates to the supply chain challenges, the Statement notes that "an easing of supply chain constraints [is] expected to support continued gains in economic activity."

With the taper process now announced, attention will turn to when the first rate hike may occur and how much the Fed will be able to raise its target interest rates. Fed Funds Futures currently project greater than a 50/50 chance of the first rate hike occurring by mid-2022