The Federal Reserve is winding down its generous stimulus program. As a counter-measure to the COVID-driven crisis, the US central bank flooded global financial markets with helicopter money. The bond-buying program of an unprecedented scale is coming to an end and the Federal Reserve is going to turn off the printing press.
Lately, the regulator announced that it would begin tapering its QE program that was launched in 2020. Since March 2020, the Federal Reserve has pumped up global financial markets with $4.4 trillion as extra liquidity. The first step is to reduce the pace of monthly asset purchases by $15 billion starting from November, the FOMC said in the post-meeting statement. So, the central bank will buy assets worth $105 billion instead of $120 billion later in November. The program will be scaled back until it is terminated in full. Specifically, the pace of monthly reductions will be $10 billion in Treasuries and $5 billion in mortgage-backed securities. The rate-setting committee decided that the time is ripe for monetary tightening because the US economy is obviously gaining momentum amid the successful vaccination campaign.
“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. … Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the FOMC indicated in the statement. Importantly, Fed Chairman Jerome Powell pointed out that tapering the QE program does not mean that rate hikes are imminent in the near future. However, investors take his comments with a pinch of salt. Currently, Fed funds futures markets suggest a 64% probability of the first rate hike in June 2022.
