Through Edouard Wemy

Declining refers to the Federal Reserve’s policy of unwinding the massive purchases of Treasury bonds and mortgage-backed securities it made to support the economy during the pandemic.

Unconventional asset purchase monetary policy is commonly referred to as quantitative easing. The Fed first adopted this policy during the 2008 financial crisis.

Normally, when a central bank wants to reduce the cost of borrowing for businesses and consumers, it lowers its target short-term interest rate. Corn with its target rate at zero during the 2008 crisis – when there was no inflation and the economy was still suffering – the Fed was no longer in a position to cut rates further. The Fed therefore turned to quantitative easing to further reduce borrowing costs. When the government buys assets, their prices go up, which lowers their yield or interest rate.

The Fed adopted this policy again in March 2020 after the COVID-19 pandemic led to a nationwide lockdown. In November 2021, the Fed had bought over $ 4 trillion of Treasures and other titles.

The US central bank started to shrink in November 2021, reduce total purchases by $ 15 billion per month, from $ 120 billion to $ 105 billion. The Fed decided to double the rate at which it is shrinking December 15th. Instead of $ 15 billion, the Fed will cut its purchases by $ 30 billion each month. At this rate, it will no longer buy new assets by early 2022.

Why is this important

Increasingly worried about rising inflation could hurt the economy are probably a big part of what caused the Fed to start shrinking.

Inflation is the rate of change in the price of goods and services. the Consumer price index, which includes several categories of everyday items that a typical American might buy, is the most commonly reported measure of inflation in the media. In November 2021, it was up 6.8% from the previous year.

Through any measure, inflation is higher than The Fed’s target of 2%. By reducing asset purchases, the Fed can help reduce inflation – or at least slow down its rise – because it withdraws part of the monetary stimuli that fuel economic growth.

The reason the Fed decided to speed up the process is probably because he now thinks inflation might be less transient than he had hoped, at the same time as the the job market looks strong.

What this means for you

Americans have benefited from the lowest interest rate for most of the past 13 years, making it cheaper to borrow to buy cars and homes and to start businesses.

Consumers and businesses are already starting to see slightly higher rates on mortgages, commercial loans and other types of loans.

In other words, the era of cheap money may finally be coming to an end. Enjoy as it lasts.

Edouard Wemy is Assistant Professor of Economics at Clark University and a writer for The Conversation, where this story first appeared.


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