The Federal Reserve is taking its first step toward reducing it monetary relief policy support as the economy slowly recovers. Interest rates to remain at near zero.
Fed Taking Major First Step
On last Wednesday, Federal Reserve Bank officials said, “In light of the substantial further progress the economy has made toward the committee’s goals since last December, the committee decided to begin reducing the monthly pace of its net asset purchases.”
The Fed has been buying $120B/month in mortgage-backed securities and Treasury bonds in order to keep cash flowing the financial system since March 2020. This bond buying program has, in the opinion of nearly all experts, helped to keep the economy on its feet since being hit by the coronavirus.
Now, the Fed is to reduce that $120B/month by $15B/month beginning now. This pace of reduction will close down this relief program by the middle of 2022, if such monthly reductions are sustained.
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Interest Rates to Remain Near Zero, For Now
The Fed did not tinker with its main policy interest rate, currently set near zero, at its most recent policy-setting meeting. Why? Because the Fed wants to continue keeping borrowing rates low until the labor market shows a higher level of healing with lower unemployment rates.
If, however, rapidly rising prices, also known as inflation, doesn’t cool into 2022 and jobs remain flat, Jerome H. Powell, the Fed chair, said that he and his colleagues would react by raising rates to “cool” the economy. Powell said, “If a response is called for, we will not hesitate.”
Thanks to The New York Times.