United States

Federal Reserve to taper bond purchases, not to raise rates yet 

22:15, 22 October 2021
Federal Reserve to taper bond purchases, not to raise rates yet  Photo: Joel Marklund/Keystone Press Agency/Global Look Press

The Chair of the Federal Reserve Jerom Powell said that the US central bank will slowly start decreasing the purchase of bonds adding however that it will not raise interest rates as the situation with employment is still negative.

"I do think it's time to taper; I don't think it's time to raise rates. We think we can be patient and allow the labor market to heal," he said in a statement.

What is forcing the Federal Reserve to cut stimulus is the raging inflation which is staying high and showing signs of coming back down.

It is lasting much longer than expected and Powell’s claims that it is temporary proved not to be true.

Our policy is well positioned to manage a range of plausible outcomes," he said.

The monthly purchases of the Treasury bonds currently are at an unprecedented high of $120 billion.

While the low interest rates have led to the stock market forming into another bubble with the P/E data reminding investors of the dot-com bubble. 

Consumer prices are rising at a twice higher rate than the Federal Reserve’s target of 2%.

"Supply constraints and elevated inflation are likely to last longer than previously expected and well into next year, and the same is true for pressure on wages," Powell added.

From one hand the Fed aims to help the economy recover following the pandemic while on the other side of the spectrum there is inflation created by the constant pouring of liquidity into the market. 

"While the time is near for tapering our asset purchases it would be premature to tighten policies using rates now, with the effect and intent of slowing job growth, when there is good reason to expect that we'll return to robust jobs growth and for the supply constraints to diminish, both of which we would have the effect of increasing potential output of the economy," Powell said.

Many notable investors like Michael Burry who predicted the 2008 market crash says that the US economy is in an unprecedented situation which will inevitably lead to a crash.

In Burry’s opinion along with the shares being overpriced due to the Federal Reserve’s action there is another problem which involves the boom of low cost index fund investing.

Many investing companies that manage exchange-traded funds (ETFs) keep investing in companies just because they are listed in popular indexes like the S&P making them significantly overvalued.

According to Burry this financial crisis will be hit much harder than the dot-com bubble and the 2008 crisis.