Make the016.com a preferred choice with Google by clicking here
Fed Chair Jerome Powell prepares for the end of the era of cheap money. Matt McClain/The Washington Post via AP
Edouard Wemy, Clark University
The Federal Reserve on Nov. 3, 2021, said it is winding down the bond-buying program it’s had in place since March 2020. The Fed’s policy-setting committee said it would immediately “taper” asset purchases by US$15 billion each month. The central bank had been buying $120 billion a month worth of Treasury bonds and mortgage-backed securities to fight the effects of the COVID-19 pandemic and shore up the U.S. economy.
We asked Clark University economist Edouard Wemy to explain the Fed’s tapering policy and why it matters.
Tapering refers to the policy of unwinding the massive purchases of Treasuries and mortgage-backed securities adopted by the Fed since the outbreak of COVID-19. Since March, the Fed has bought over $4 trillion worth of Treasurys and other securities in what is commonly known as quantitative easing.
The Fed says it will reduce purchases of Treasury bonds by $10 billion a month from $80 billion in October and mortgage-backed securities by $5 billion from $40 billion. That means, for example, the Fed will buy $70 billion of Treasurys in November and $60 billion in October. While the Fed said it may change the pace of the drawdown, if it continues at this pace it’ll stop buying new assets by mid-2022.
Quantitative easing is an unconventional monetary policy tool that consists of the large-scale purchase of various types of assets, including Treasurys, corporate bonds and other securities.
The Fed first adopted this policy during the 2008 financial crisis after it dropped its benchmark interest rate – its main policy tool for affecting short-term market borrowing costs and therefore the overall economy – to virtually zero.
But with its benchmark rate at zero – at the same time that there was no inflation and the economy was still hurting – the Fed was no longer able to use its main policy lever to support workers and stimulate economic growth by making it cheaper to borrow. And so the Fed turned to quantitative easing as a way to continue to provide credit to the economy and further lower borrowing costs for companies and consumers. By buying assets, their price goes up, which lowers their yield or interest rate.
Growing concerns that rising inflation could harm the economy are likely a big part of what led the Fed to change its policy.
Inflation is the rate of change in the price of goods and services. The Consumer Price Index, which includes several categories of everyday items that a typical consumers may buy, is the measure of inflation most often reported in the media. By October 2021, it was up 5.4% from a year earlier.
However, the Fed typically prefers the core Personal Consumption Expenditures measure of inflation because, unlike the CPI, it excludes volatile food and energy prices. This other measure, usually lower than the CPI, has climbed a little less, or 4.4% over about the same period
But both measures have been above the Fed’s target of 2% annual inflation in recent months. Many observers have viewed this upward trend as an indication that the Fed might even have to increase interest rates soon – something that could lead to slower economic growth.
In its Nov. 3 statement, the Fed cited signs the U.S. economy is strengthening, “progress on vaccinations” and elevated inflation as key considerations as it began pulling back, a little, on its asset purchases. But the Fed also emphasized that it intends to keep an “accommodative” stance on monetary policy – meaning it will keep up 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 driven by transitory factors tied to the pandemic, like increases in the cost of used cars, higher consumer demand and supply chain problems. That’s how the Fed sees it, for now, and it will be watching inflation closely in the coming months.
Consumers and companies are already beginning to see slightly higher rates on mortgages, business loans and other types of borrowing.
At the same time, investors are expecting the Fed to hike its own benchmark interest rate sooner than planned. The Fed also changed its timetable for interest rate increases to 2022 from 2023.
Consumers have enjoyed rock-bottom interest rates for the better part of the past 13 years, helping make it cheaper to buy cars and homes and start businesses.
Higher interest rates – whether as a result of the Fed’s buying fewer assets or the market’s simply anticipating higher rates – would of course increase the cost of borrowing for mortgages and cars loans, which in turn can slow economic activity.
At the same time, a small rise in rates may have other positive effects for some consumers. For example, it could cool down the housing market, which would make it easier for some people to buy a home.
One way or another, it seems the Nov. 3 policy change may signal the era of cheap money may finally be coming to an end – but still not for a while, so enjoy it while it lasts.
[Over 115,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today.]
Edouard Wemy, Assistant Professor of Economics, Clark University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Make the016.com a preferred choice with Google by clicking here
In The News
>WEATHER: Mark Rosenthal's 7-day forecast (:23). High of 75 today in Worcester
>TOP OF THE NEWS
-Worcester police ask for help finding missing girl
-Worcester police ask for help finding missing 14-year-old
-Shrewsbury shooting victim ID'd as Kevin Doherty, 56; suspect arraigned
-Related: New details revealed in deadly shooting of Shrewsbury dad (3:03)
-Related: Suspect’s criminal history includes machete attack, fights
-Related: Machete attack victim says suspect should have been in jail (2:46). Article
-Related: Suspect who allegedly killed Shrewsbury father is held without bail (2:32)
-Earlier: Shrewsbury father shot to death after walking 6-year-old child to school (2:58). Article
-Firefighters battle blaze at scrap metal site in Worcester
-Webster woman in court after allegedly causing bomb scare at convenience store (:32). Article
-Worcester motorcyclist killed in crash with tractor-trailer remembered
-Goodbye trash, and pounds: City D.P.W. crews make clean sweep of streets
-Spotted lanternfly detected in 13 Worcester County cities and towns: How to stop the spread
>POLITICS: Meet the candidates: Jermoh Kamara on health, schools, community
-The016.com announces political ad packages
-WCCA-TV's WCCA-TV Primary Candidate Forum (41:14)
>DINING OUT: New Worcester Mediterranean restaurant announces official opening date
-ICYMI: Worcester man charged with killing his toddler son in Ohio ordered held without bail
-Worcester police ask for help finding missing 14-year-old
-Traffic delays after tractor-trailer gets stuck under bridge in Worcester
-State Police recruit from Worcester died from blunt force injuries, family attorney says (2:21). Article
-See the rest of the day's Worcester news
>HOLDEN (brought to you by Lamoureux Ford): Holden recreation fields formally opened
-America's newest game show, filmed at Lamoureux Ford (1:40)
-September Among Friends senior newsletter
>THE BURBS (brought to you by North End Motor Sales): It’s the Spencer Fair!
-It's the first year at the new David Prouty High. Here's what it looks like
-Dudley man arrested after shoving officer during intoxicated dispute at home
-Man charged after crashing into pole and tearing through yards in West Boylston
-Sample ballot for September 8th Paxton vote
-Leominster residents urge council to reverse Orchard Hill zoning to block apartment project
-D.J. or band needed for Rutland Sock Hop
>BARS & BANDS: The Mayor's Live Music List for Saturday
-Jazzed Up Trio at Pinecroft Dairy 5 p.m. Sunday
>SHOWTIME: Things to Do: Chainsmokers at Breakaway Festival, KC and the Sunshine Band and more ...
-"Whirlwind": Worcester fans raise money for movie about cycling legend Major Taylor
-King Richard's Faire opens new location in Carver for 44th season
-Design a bookmark for this Worcester Public Library contest
>OPINION: Stacey Kenneally: Finding our way — Wins with my sensory child
-First Person: In matters of faith, Joe Fusco Jr. looks for "returns"
-WCCA-TV's What It’s Worth No. 478 (28:59): Movie Reviewers
>OBITUARIES: Tribute to nurse who worked at UMass Memorial for 33 years
>SPORTS: Patriots release veteran safety Jabrill Peppers in surprise move
-Patriots unveil new alternate uniform for Week 13 game vs. Jets
-Red Sox lose to Pirates, 4-2
-Red Sox release Walker Buehler to end $21 million debacle
-WooSox lose to Durham, 5-3
-Worcester Academy basketball legend joins athlete advisory board for Boston Legacy FC
>NATIONAL: Middle schoolers shielded younger students using buddy system during school shooting
-Radio Worcester (13:19): McGovern warns of capital militarization, vows to reintroduce Epstein files amendment
>TRAGIC: Bullfighter gored to death in shocking arena attack in Portugal (2:01)
>NEW ENGLAND: State Police enforcing Move Over law over Labor Day weekend
-I.C.E. has arrested more noncriminals than criminals in Mass. this year: See stats
>COLLEGES: Assumption welcomes its newest Hounds
-WPI biomedical engineering professor receives $630,000 grant for fibrosis study
>TRAVEL (brought to you by Fuller RV & Rental): 8 of the world's biggest natural arches
>BUSINESS: New inflation data factors into the Fed's interest rates decision
-LPL Financial Research: Grand ideas at the Grand Tetons
-Can a resolution be reached at Market Basket next week? (17:15)
>SHOPPING: Wayfair Labor Day sale | Save up to 80%
>HEALTH: CVS restricts COVID shots in 3 states, including Mass.
-Caffeinated coffees are mostly free of toxins, with a few exceptions
>FOOD: Kellogg's becomes first company to sign binding agreement removing toxic dyes from cereals
>TV/STREAMING: New shows & movies to watch this weekend
>MOVIES:New movies on streaming: "Together," and more
>CELEBRITY: Bruce Willis' wife reveals his "scary" symptoms pre-dementia diagnosis
-Idris Elba admits he's never watched "The Wire"
>ANIMALS: Dumped neglected dog learns to be a puppy again (1:49)
>HISTORY: What is gerrymandering? You can trace its history back to Mass.
>GOOD NEWS: Needham girl's book about cancer journey features police pup who escorted her home
-Meanwhile, Bermuda Triangle mystery solved? This scientist’s theory is making big waves (4:53)
Latest obituaries | | Friday's Highlights | | Today's horoscope | | Local Sports
Quick Links: Personalize your news | | Browse members | | Advertise | | Blogs | | Invite friends | | Videos
Animals | | Boston Sports | | Business | | Cars | | Celebrity | | Colleges | | Commute & Travel | | Crime | | Faith | | Food | | Good News | | Health | | Help Wanted | History | | Homes | | Local Sports | | Lottery | | Movies | | National | | New England | | Politics | | Shopping & Deals | | SHOWTIME! | | TV & Streaming | | Weather