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Federal Open Markets Committee meeting revealed that Fed members are considering tapering their asset purchasing program. The US Federal Reserve might reduce the $40 billion monthly purchase of mortgage-backed securities.
It sent many investors into panic, causing them to liquidate many of their assets.
Tapering is when the central bank slows down in their accumulation of new assets on its balance sheet. This could mean the Fed is winding down—or completely withdrawing from—the monetary stimulus program.
Investors don’t like that idea because that means the Fed will reduce the $120 billion or so of bonds they buy.
This is also referred to as quantitative easing.
Obviously, when there are less investments made, the value of assets goes down since demand goes down.
The last time the Fed tapered was 2013.
However, the circumstances are different.
Bloomberg’s Bill Dudley offered some valuable insights.
One, In 2013, The Fed had little experience with winding down an asset purchase program. That left market participants uncertain about the timing and sequencing of the transition to a world with no asset purchases and higher interest rates.
Now, Fed officials have the experience of 2013. We are better able to determine the steps needed to help the economy recover.
Two, this is a long-term program. Assuming that the economic outlook doesn’t change much, it’s probably about six months away. They said, they won’t start to taper until inflation is down 2%. That is 2% by their calculation. Even with a strong economy, that will take time.
Three, the economy is still far from full employment: specifically, about 7.6 million jobs short of where it was prior to the pandemic. Even with gains of 1 million jobs per month, achieving “substantial further progress” would take at least several months.
Four, $80 billion in Treasury securities and $40 billion in mortgage-backed securities every month will be eased out, not killed in a month or two.
If, for example, the central bank cut purchases of both Treasury and mortgage-backed securities by $10 billion per month at each policy-making meeting, mortgage-backed purchases would reach zero after 4 meetings, compared with 8 meetings for Treasuries.
Just keep in mind that this tapering is a good sign. Every dollar the US uses to buy assets right now is coming right out of the money printing press, so to speak.
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