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The Fed Plans to Taper. Here鈥檚 What That Means. | WSJ - YouTube
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- [Narrator] In this market environment,
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the very mention of one economic term sets
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the big indexes on edge.
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- But at this point, the
economy is very strong
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and inflationary pressures are high.
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And it is, therefore,
appropriate in my view
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to consider wrapping up the taper
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of our asset purchases,
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which we actually announced
at the November meeting
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perhaps a few months sooner.
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- [Narrator] That's the
Chairman of the Federal Reserve
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in late November, foreshadowing
that the central bank
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would speed up tapering or winding down
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of the bond-buying program
it launched in 2020
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to help fight the
COVID-19 economic crisis.
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His words sent a shudder
through the markets.
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- Taper.
- Tapering.
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- Tapering.
- Taper.
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- They should be tapering.
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- [Narrator] And it's easy to see why.
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The Fed's stimulus has
fueled a historic rally
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that has lifted major indexes
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far beyond their pre-pandemic highs.
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So if the economy is
strong, as Powell said,
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and stimulus has been so
good for stock portfolios,
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why are the markets so worried?
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Here's Jerome Powell again.
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This time in July of 2020,
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amid pandemic shutdowns that
had ground the global economy
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to a halt.
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- At the Federal Reserve,
we remain committed
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to using our tools to do what we can
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and for as long as it takes
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to provide some relief and stability.
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- [Narrator] He was promising in part
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to continue purchasing $80
billion of Treasury bonds
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and $40 billion of mortgage-backed
securities every month
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to increase the money
supply, encourage lending
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and help bring the economy
back from the brink.
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This type of stimulus is
called quantitative easing.
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And it works like this.
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When the Fed buys securities
on the open market,
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it takes them out of circulation,
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leaving fewer for everyone
else to complete for.
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With less supply,
investors bid up the price
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of the remaining securities,
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and is always the case with bonds,
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when the price goes up,
the yield goes down.
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So what does it mean for you?
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Since treasuries are a benchmark
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for other types of lending,
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lower yields on long-term Treasury bonds
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can mean cheaper corporate
bonds and mortgages,
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which can lead to more
hiring and home buying
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throughout the economy.
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This helps explain why markets thrive
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on quantitative easing,
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and why they get jittery
at the mention of tapering.
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But there are a few
things to keep in mind.
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First, tapering refers
to winding down the rate
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at which the Fed adds
to its balance sheet,
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not actually reducing the total holdings.
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The current plan is to reduce purchases
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by $30 billion a month to end in March.
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During this period,
the Fed's balance sheet
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will keep growing, just more slowly.
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Second, winding down then
stimulus puts the Fed
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in a position to focus on another
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of its imperatives, price stability.
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Here's the former secretary
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of the Treasury Larry Summers talking
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to The Wall Street Journal's Greg Ip.
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- We're now running with
inflation in the 5, 6% range.
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And achieving the soft landing
from that without recession.
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I think it's not likely to be easy.
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- [Narrator] Inflation
rose to 6.8% in November
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from a year earlier.
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The fastest pace since 1982.
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A year and a half of stimulus
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has driven a rise in household income,
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spurring a sharp run-up in home values
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and other assets.
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This has boosted wealth
for many Americans,
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fueling stronger demand.
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Meanwhile, a tight labor market
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and lasting supply chain issues
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has restricted supply,
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leading many businesses to raise prices.
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This is the big reason Powell is talking
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about speeding up the taper.
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The sooner the Fed
completes the wind-down,
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the sooner it would be able to focus
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on bringing inflation back
down to its 2% target.
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- We are committed to
our price stability goal.
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We will use our tools,
both to support the economy
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and a strong labor market,
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and to prevent higher inflation
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from becoming entrenched.
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- [Narrator] On Wednesday,
Fed officials signaled
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they were prepared to raise
interest rates next year
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to help bring down high inflation,
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and some more hawkish economists
see a bumpy road ahead.
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- I think we've got a very difficult set
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of policy management
challenges ahead of us
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with a period of entrenched
inflation looking
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like the immediate prospect.
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- [Narrator] But for all
the Fed's preparations,
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Powell says it still expects inflation
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could retreat on its own.
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- Most forecasters, including at the Fed,
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continue to expect that inflation
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will move down significantly
over the next year
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as supply and demand imbalances abate.
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- [Narrator] With an uncertain road ahead,
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the markets will continue watching the Fed
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for any sudden moves.
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(pensive music)
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