Since the beginning of the COVID-19 pandemic, the Federal Reserve has been buying around $120 billion worth of equities every month to bolster the U.S. economy. After a two-day meeting this week, Fed Chairman Jerome Powell announced that tapering purchases by around $15 billion per month are set to begin.
Financial markets have been expecting the announcement for some time, contributing to record highs for American stock markets. The announcement comes amid ongoing inflation, labor shortage issues, and the supply-chain crisis. Those problems do not appear to end quickly, leading commentators to ask why the Fed is choosing to cut back on stock purchases.
Analysts observe that the Fed announcement must reflect a promising path for the economy despite the significant issues. The central bank has released a statement about rising prices stating its belief that demand oversupply and the “reopening of the economy” has led to high consumer prices.
Powell stated that he feels the consumer price inflation hitting the country will “not have a permanent imprint,” especially for households “most sensitive to higher prices” for food, housing, and energy.
The Fed’s announcement came after a summer when Americans were repeatedly assured that inflation was “transitory,” which has, of course, proven to be incorrect. The pressure on the Fed to keep interest rates low until next year’s midterm elections are completed will be immense, and it is unknown how that will be possible if inflation continues to surge.
Powell said that the pace of stock purchase tapering could be adjusted depending on the “economic outlook” over the coming months. He did not provide any specific details regarding what changes in the “outlook” might look like.
Part of the risk the Fed faces in waiting to deal with inflation is that it becomes harder to drive down the longer it runs unchecked. The example of the Carter administration came to mind when rate hikes by the Fed were not implemented until 1979, when the problem had raged for years. It took interest rates set at 20 percent by the summer of 1981 to get inflation under control. That was when the national debt was at virtually microscopic levels compared to the gross domestic product we are saddled with now.