Stimulus will ease back, but interest rates unchanged
The economy hasn’t fully recovered from the effects of the COVID-19 pandemic, but it’s well on the way. That’s the assessment of the Federal Reserve, which will begin tapering its stimulus this month.
“It is time to taper, we think, because the economy has made substantial progress towards our goals,” Fed chairman Jerome Powell. “We don’t think it’s time yet to raise interest rates.”
The Fed will still buy $70 in Treasury securities in November and $35 billion in mortgage-backed securities. Those amounts will go down to $60 billion and $30 billion, respectively, in December. The stock markets reacted well, with the Dow closing above 36,000 for the first time Wednesday.
Interest rates will remain near zero for the time being, with the recovery determining when the Fed might raise rates. The job market might be the biggest unknown in that equation.
“By many measures we’re in a very tight labor market. But the issue is, how persistent is that?” Powell said.
The Fed has bought $4 trillion worth of bonds since March 2020 as it tries to inject a stimulus to an economy that has started back unevenly, depending on the sector.
“With these actions, monetary policy will continue to provide strong support to the economic recovery,” Powell said.
In 2013, when the Fed began tapering stimulus measures brought on to fight the Great Financial Crisis, investors reacted badly, sparking a “taper tantrum” that brought volatility to financial markets. So far, that has not happened.
“The market always learns and adjusts,” Matt Freund, co-chief investment officer at Calamos Investments, told Reuters. “2013 is a lesson that’s not going to be ignored.”