- The US Central Bank want to slow down on asset purchases as the US economy recovers.
- Investors watch out for news about a possible tapering soon.
- Wall Street watchers try to figure out when the tapering will take place
YEREVAN (CoinChapter.com) — The US Federal Reserve is creating ripples in the markets yet again. The United States apex bank plans to slow down its asset purchases, thanks to the indicators that the U.S. economy is on the road to recovery.
However, what has kept investors at the edge of their seats is the expected “tapering” program of the Federal Reserve.
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What is Tapering?
The term “tapering” always makes investors nervous.
Under the program, the Federal Reserve begins to reduce the number of bonds it buys each month. When tapering is launched, the Fed starts to slow down its asset purchases from the market.
Currently, the Federal Reserve buys some $120 billion bonds a month as part of its Quantitative Easing program launched to help markets survive the shutdown due to Covid 19.
Quantitative easing (QE) is a monetary policy of the apex bank. Under the program, the bank purchases longer-term securities from the open market to help increase the money supply and encourage lending and investment.
Buying these securities injects money into the economy and expands the central bank’s balance sheet.
In the dark
While investors expect the Fed to start tapering sooner or later, its secrecy regarding the dates is nerve-wracking. The Federal Reserve is playing the game with a poker face on. It is doing everything not to offer any clues as to when it will begin the tapering program.
The Federal Open Market Committee will meet on the 27th and 28th of July to revisit its monetary policy stance. However, Fed watchers do not tie high hopes with Chairman Jerome Powell. He is unlikely to ease their worries and share much detail on a timeline to tapering.
RSM Chief Economist Joe Brusuelas expects the Fed to drag its feet further before finally beginning to taper.
“…the rising risks around the Delta variant, which is going to push down growth forecasts, provides the Fed with a little bit more room to delay the inevitable.”, Brusuelas told Yahoo Finance.
Although the US economy is recovering faster than expected, the new variants of the virus may cause another outbreak. The Fed, it seems, does not want to jump the gun before being sure of its steps.
On the 29th of July, the second-quarter actual GDP report is due. Perhaps the Central Bank will want to examine the report to get a sense of how the market is doing at the moment before taking a call on any tapering policy.
Playing the tapering guessing game
With Jerome Powell refusing to reveal his hand, Wall Street analytics have no choice but to resort to playing a guessing game.
Goldman Sachs, for example, harbors hopes that the Fed will at least hint about tapering when it gathers in August for a conference in Jackson Hole, Wyoming. The next scheduled FOMC meeting is in September.
Perhaps they will choose that time to send out information, should they fail to give out indicators in August. Moreover, Goldman Sachs, ING Economics, and JPMorgan are hopeful that by December, the Fed will make a formal announcement.
However, Mathew Luzzetti of the Deutsche Bank thinks that the Fed officials will officially announce their tapering plans at their meeting on November 3.
When the Federal Reserve stepped in
When the Covid 19 broke, the Fed took action, sending out mixed signals to investors and market players.
As part of the US Federal Reserve’s policy to help the economy at the brink of crisis, the Federal Reserve lowered the rate to charge banks for loans from its discount window from 2.25% to 0.25%. Additionally, the Fed also extended the repayment terms to 90 days instead of the standard overnight repayment policy.
Through the Primary Market Corporate Credit Facility (PMCCF), the Federal reserve envisioned lending directly to corporations by buying new bond issuances and providing loans.
In March 2020, the Federal Reserve pledged to buy a minimum of $500 billion in Treasury securities.
Additionally, it promised to buy $200 billion in government-guaranteed, mortgage-backed securities. The Federal Reserve also announced that it would provide large sums in loans to small and medium businesses and Non-Profits as part of its various assistance programs.
At the time, these measures came as a warning to financial pundits.
They took the move to indicate future inflations in the market, prompting corporations like Michael Saylor’s MicroStrategy to play safe by allocating large chunks of their balance sheets to Bitcoin.
With the US economy recovering, the decision of the Federal Government regarding tapering is awaited. However, uncertainty as far as timing goes has kept the market in limbo.