Chairman Powell said today that the Fed plans on decreasing their bond purchases by $15 billion or 12.5%. The Federal Reserve is currently purchasing $120 billion in treasuries and bonds per month, thus, putting money into the economy. This increases money supply, velocity of money, inflation and liquidity. However, as the Fed decreases these purchases, they are essentially trying to tighten the money supply and slow down their “easy money” policy that has been in place for a year and a half now. However, one very important thing to note is that the Federal Open Market Committee (FOMC) which sets federal funds rates and the overnight reserve ratio - voted to not raise interest rates just yet.
What this means: Banks are able to borrow from each other basically for free as interest rates go to near zero. However, banks will not need to do this when the overnight reserve ratio is zero. This means that the 10%-20% of cash that had to be on hand at any given moment doesn't stay stagnant. This process called Quantitative Easing freed up billions of dollars of the “bank’s money” as they can now put that money to work in the economy and investments. With the overnight reserve requirement still at zero, banks are going to be able to put more money into the economy, stimulating growth. What I think: I personally believe this a move in the right direction. The Fed should continue to tighten the money supply ever so slowly to make sure inflation is truly transitory, but to also ensure that our economy is going to make a full and healthy recovery. This is a very fine process, but I believe that the government will be able to achieve a full economic recovery, while staving off inflation. Today the markets reacted positively, because they shared the same view becouase of the good timing. This move shows that we are trending in the right direction. I do think that the Fed could possibly be tightening a little bit more, but I understand the caution in their movements as they are prioritizing the recovery of the economy. Conversely, I would have to make the argument that inflation and higher prices while wages stay relatively the same would be worse than an economy that takes a little longer to recover, but I am not the one making the decisions (rightfully so). Overall, is really going to help the technology sector. With interest rates remaining low for the time being and the Fed prioritizing a slow recovery with an easy money policy, I think technology is going to continue to have a great year. The pandemic shined a light onto how dependent we are on technology and how we can use it even more in the workplace. By slowly tightening rather than putting an all out stop to QE, the Fed is prioritizing growth in the economy - it is not disputed that technology is where a lot of the growth in our economy is currently and they will probably benefit the most. Favorite Stock: TQQQ Works Cited: https://www.brookings.edu/blog/up-front/2021/07/15/what-does-the-federal-reserve-mean-when-it-talks-about-tapering/ https://www.cnbc.com/2021/11/03/fed-decision-taper-timetable-as-it-starts-pulling-back-on-pandemic-era-economic-aid-.html
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