Fed will start reducing the pace of its stimulus bond purchases

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Fed will start reduc

The Central Bank of the United States Federal Reserve System (Fed) decided at its last meeting of its governing body – the Federal Open Market Committee (FOMC), which took place on 2 and 3 November 2021, that by the end of this November the pace of bond purchases will begin to slow. This begins to move away from direct pandemic aid to the entire United States (US) economy, with these asset buyouts coming to a complete halt by next year 2022.

Fed Chairman Jerome Powell has justified its decision by expecting further positive improvements in the US domestic economy and currently intends to turn its attention to tackling inflation. “Inflation is elevated, largely reflecting factors that are expected to be transitory,” said the FOMC Fed’s statement. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the Fed’s central bankers added. Mr. Powell said he expects inflation to continue to rise as supply problems continue and then will begin to pull back around mid-2022. “Our baseline expectation is that supply chain bottlenecks and shortages will persist well into next year and elevated inflation as well,” Mr. Powell said at a news conference after the FOMC meeting.

Tapering of bond purchases will begin “later this month,” said the Fed’s key monetary policy-making body – the FOMC – in a statement after its meeting on Wednesday, 3 November. The reductions of US$15 billion each month – US$10 billion in Treasurys and US$5 billion in mortgage-backed securities – from the current $120 billion, are to follow. The FOMC said the move came “in light of the substantial further progress the economy has made toward the Committee’s goals since last December.” The FOMC also said that “the Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” acknowledging that price growth was faster and more sustained than central bankers assumed, however, the FOMC did not back down from its position that the state of increased inflation is only temporary.

According to analysts and investment banks’ financial strategists, financial markets reacted positively, major global stock indices – especially the US stock market – strengthened, along with government bond yields. On 3 November 2021, the exchange rate of the US dollar (USD) strengthened especially against the Japanese yen (JPY) on the international foreign exchange – Forex market. On 4 November at 6:03 am CET, the USD/JPY currency pair traded on the Forex market at a mutual exchange rate of JPY 114.16 per USD, with the daily strengthening of the USD by + 0.16% against JPY. At the time mentioned the EUR/USD global currency pair traded at US$ 1.1589 per EUR, with a daily decline of EUR by -0.18% against the USD.

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