December 20, 2021
The Federal Reserve has started to “taper.”
That means it is reducing its enormous buying of bonds by $15 billion per month ($10 billion in Treasury bills, $5 billion in mortgage-backed securities). The reduction should be complete around July 2022, though that’s subject to change.
What exactly does that mean?
Well, money basically has been free for the past year or so thanks to the Fed’s all-spigots-flowing approach to stimulus. Interest rates have been near 0% and there’s been a massive monthly investment in bonds and mortgages, which keep yields near 0% as well.
So, while the Fed eases the stimulus, borrowing could grow more expensive. Businesses will pay more for debt and profits will erode. That will surely sadden Wall Street. For everyday people, it will cost more over time to buy a home or borrow money for a business, project, or anything else.
The Fed’s balance sheet has exploded over this time, more than doubling:
The Fed’s assets stood around $4 trillion when it began buying bonds last year. The balance sheet now stands at more than $8 trillion and is expected to top $9 trillion before the stimulus winds down next year.
No central bank in the world has spent at such a magnitude before. Is it any wonder we’ve experienced the highest inflation in 30 years?
But people seem fed up with inflation. They want action sooner, even if short-term rates would rise. At least one Fed official seems to agree.
On a more cheerful note, we want to take the time to wish you and yours a Merry Christmas – may the holiday season bring good health and lots of joy!