Fed Started Tapering As Inflation Concerns Mounted

 

Last Wednesday, The Federal Reserve Committee decided to begin cutting asset purchases. The process comprised a $10 billion decrease in Treasury securities and a $5 billion decrease in mortgage-backed securities.

 

The Committee also determined that such cuts in asset purchases would be acceptable for each month, but it reserved the right to adjust the pace of purchases if economic forecasts change.

 

While inflation is a major issue, the Federal Reserve was concerned that raising interest rates too soon would jeopardize recent accomplishments.

 

In 2018, fueled by optimism of US economic growth, the Fed moved on with a series of rate hikes to avoid overheating the economy. Despite constant pressure from President Donald Trump, the Fed raised interest rates for the ninth time since 2015. The economy turned out to be far worse than expected; following a weaker-than-expected fourth quarter, the US GDP grew by 3% in the first quarter of 2019.

 

However, inflation has already returned to the 2% target, and as a result of the trade war between the US and China, US GDP growth continued to decline over the next three quarters, averaging only 2% a quarter. Ultimately, due to the economic slowdown and recession fears, the Fed reduced interest rates three times in mid-2019.

 

 

This could have affected the committee’s decision to be wary of inflation and economic recovery at this time. The Fed has not yet indicated a willingness to raise interest rates before June 20, 2022. One of the challenges confronting the economy is the slow growth of the labour market. Despite a 531,000 increase in non-farm payrolls over the previous month, October’s job data indicated that labour participation remained unchanged. At the same time, vaccine mandates create new conflicts between employees and employers, exacerbating the current labour shortages and supply chain crisis.

 

Some hedge fund managers accused the Fed of being excessively dovish, implying that if inflation is no longer transitory, the economy may enter a recession in 2022. Inflation in the United States is currently at a 25-year high, with little signs of easing. In a recent CNN interview, Energy Secretary Jennifer Granholm predicted that fuel prices would continue to rise, resulting in higher heating bills for Americans this winter. The next report for October is expected to release this Wednesday.

 

Image source: costar.com

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