Wednesday, January 19

What is the Fed Tune-Up?

Reducing refers to the Federal Reserve’s policy of undoing the massive purchases of Treasury bonds and mortgage-backed securities that it has been making to prop up the economy during the pandemic.

The unconventional monetary policy of buying assets is commonly known as quantitative easing. Fed first adopted this policy during the financial crisis of 2008.

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Typically, when a central bank wants to lower the cost of business and consumer loans, it lowers its short-term target interest rate. But with your target rate at zero During the 2008 crisis, at the same time that there was no inflation and the economy continued to suffer, the Fed was no longer able to cut rates further. Therefore, the Fed turned to quantitative easing as a way to further reduce borrowing costs. When the government buys assets, their prices go up, which reduces your yield or interest rate.

The Fed adopted this policy again in March 2020 after the Covid-19 pandemic triggered a national lockdown. By November 2021, the Fed had bought more than 4 trillion US dollars from Treasures Y other values.

The US central bank began to shrink in November 2021, reducing total purchases by $ 15 billion a month, from $ 120 billion to $ 105 billion. The Federal Reserve decided to double the rate at which it narrows December 15. Instead of $ 15 billion, the Fed will cut purchases by $ 30 billion each month. At that rate, it will no longer buy new assets in early 2022.

Why does it matter

Growing concerns among economists that rising inflation That could hurt the economy are probably a big part of what prompted the Fed to start downsizing.

Inflation is the rate of change in the price of goods and services. The Consumer’s price index, which includes several categories of everyday items that a typical American might buy, is the most frequently reported measure of inflation in the media. In November 2021, was 6.8% more than the previous year.

For any measure, inflation is above the Fed target of 2%. By reducing asset purchases, the Fed can help reduce inflation – or at least slow its rise – because it is withdrawing some of the monetary stimulus that is driving economic growth.

The reason the Fed has decided to speed up the process is probably because now he believes that inflation may be less transitory than he expected, at the same time as the the job market looks strong.

What this means to you

American people have enjoyed very low interest rates for most of the past 13 years, which has made it cheaper to borrow money to buy cars and houses and start businesses.

Consumers and businesses are already beginning to see slightly higher rates in mortgages, business loans and other types of loans.

In other words, the era of cheap money could finally come to an end. Enjoy it while it lasts.

This is an updated version of an article originally published on November 3, 2021.The conversation

Edouard wemy, Assistant Professor of Economics, Clark University

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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