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The Fed is phasing out its market-boosting economic medicine, but investors aren’t rattled

Thursday, November 4, 2021 by Robinhood Snacks |

I've got the Powell... Probably Fed Chairman Jerome Powell's morning pump-up song. Yesterday the Fed finally approved plans to start scaling back its economy-boosting bond-buying program. The Fed will start this month, buying $15B less in bonds — and will end bond purchases altogether by June. ICYMI: The Fed has been dropping a whopping $120B a month to buy Treasury and mortgage bonds, adding trillions to the money supply since the pandemic started. Quick refresher:

  • The Fed buys bonds from banks, and that cash flows through banks to consumers and businesses via loans. More money = fewer problems.
  • All that new cash helped bring us ultralow interest rates, which made borrowing easier and boosted spending — but also contributed to rising prices.

Feeling #flated... The Fed has been monitoring inflation, unemployment, and recovery — and decided the time was ripe to dial back economic medicine. While the Fed still expects inflation to be temporary, prices have been surging longer (and higher) than anticipated. Blame shortages, supply-chain headaches, and soaring consumer demand. Twelve-month inflation is at its highest level in decades, and oil prices have jumped 42% from last year. BTW: Fed officials don’t want to raise interest rates (by selling bonds) until they've fully ended bond purchases.

THE TAKEAWAY

Wall Street isn't sweating... Stocks jumped yesterday after the Fed’s announcement, and have been cruising around records for weeks. Investors aren’t surprised: The Fed has been signaling it would taper bond purchases for nearly the whole year. Wall Street also sees the move as a sign that the economy is strong and ready for less hand-holding. The unemployment rate fell to 4.8% in September, just 1.3 percentage points higher than the pre-pandemic rate. While the US's growth majorly slowed last quarter, the economy is expected to grow 5.6% this year as recovery continues.