On November 3, 2021, the Federal Reserve announced that it was ending the bond buying program it had put in place since March 2020. The Fed’s Policy Development Committee said it would immediately be “tapered” asset purchases of $ 15 billion each month. Central bank had bought $ 120 billion per month Treasury bonds and mortgage-backed securities to combat the effects of the COVID-19 pandemic and support the U.S. economy.
We asked the economist at Clark University Edouard Wemy to explain the Fed’s tapering policy and why it matters.
1. What is unraveling?
Declining means the unwinding policy for massive purchases of TMUBMUSD10Y Treasury bills,
and mortgage-backed securities adopted by the Fed since the COVID-19 outbreak. Since March 2020, the Fed has purchased more than $ 4 trillion in Treasures and other titles in what is commonly referred to as quantitative easing.
The Fed said it would cut treasury bond purchases by $ 10 billion per month from $ 80 billion in October and $ 5 billion from $ 40 billion in mortgage-backed securities. This means, for example, that the Fed will buy $ 70 billion in treasury bills in November and $ 60 billion in October. While the Fed has said it may change the pace of the pullout, if it continues at that pace, it will stop buying new assets by mid-2022.
2. What is quantitative easing?
Quantitative easing is an unconventional monetary policy tool that involves the large-scale purchase of various types of assets, including treasury bills, corporate bonds, and other securities.
The Fed first adopted this policy during the 2008 financial crisis after that lowered its benchmark interest rate—Its main policy tool to affect short-term borrowing costs in the market and therefore the economy as a whole — to virtually zero.
But with its benchmark rate at zero, while there was no inflation and the economy still suffered, the Fed was no longer able to use its main policy lever to support workers and stimulate economic growth by making borrowing less expensive. So the Fed turned to quantitative easing as a way to continue to provide credit to the economy and further reduce borrowing costs for businesses and consumers. By buying assets, their price goes up, which lowers their yield or interest rate.
3. Why is the Fed declining now?
Growing concerns that rising inflation could hurt the economy are probably a big part of what prompted the Fed to change its policy.
Inflation is the rate of change in the price of goods and services. The cconsumer price index, which includes several categories of everyday items that a typical consumer can purchase, is the most commonly reported measure of inflation in the media. By October 2021, it was up 5.4% from the previous year.
However, the Fed generally prefers the core ppersonal consumption expenditure measure of inflation. This other measure, generally lower than the CPI, climbed slightly less, at around 4.4% over the same period.
But both measurements were greater than the The Fed’s target of 2% annual inflation in recent months. Many observers have taken this upward trend as an indication that the Fed may even have to raise interest rates soon, which could lead to slower economic growth.
In its Nov. 3 statement, the Fed cited signs of strengthening the US economy, “immunization progress” and high inflation as key considerations as it began to pull back a bit from its purchases of ‘assets. But the Fed also stressed that it intends to maintain an “accommodating” stance on monetary policy – meaning it will maintain its support in terms of low interest rates and other measures – until it achieves maximum employment and price stability.
The recent increase in consumer prices may be due to transient factors linked to the pandemic, such as the rising cost of used cars, increased consumer demand and supply chain issues. That is how the Fed sees it, for now, and it will be monitoring inflation closely over the next few months.
4. Could this mean a hike in interest rates anytime soon?
Consumers and businesses are already starting to see slightly higher rates on mortgages, business loans and other types of borrowing.
5. How will this affect consumers?
Consumers have benefited from the lowest interest rate for most of the past 13 years, helping to make it cheaper to buy cars and homes and start businesses.
Higher interest rates, whether because of the Fed buying fewer assets or simply because the market anticipates higher rates, would of course increase the cost of mortgage and auto borrowing. which in turn can slow down economic activity.
At the same time, a slight increase in tariffs can have other positive effects for some consumers. For example, it could cool down the housing market, making it easier for some people to buy a home.
Either way, it looks like the November 3 policy change may signal that the era of cheap money is finally coming to an end, but not for a while, so make the most of it. it lasts.
Edouard Wemy is Assistant Professor of Economics at Clark University.
This commentary was originally posted by The Conversation—Fed cuts support for bond markets and economy: 5 questions answered on what it means
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