Federal Reserve Chairman Jerome Powell has officially announced that the US economy is ready to cut back on asset purchases by the US Fed, however, he doesn’t think this is the right time to raise the rate. interest. Powell said in a virtual meeting before a conference, “I think it’s time to slow down; I don’t think it’s time to increase the rates. We believe we can be patient and allow the job market to heal. Our policy is well positioned. to manage a range of plausible outcomes.
At the event hosted by the South African Reserve Bank, Jerome Powell also said: “No one should doubt that we will use these tools to bring inflation down to 2% over time. At the same time, we believe we can be patient and allow the recovery to take place and allow the labor market to recover. ”Powell also believes the market is not ill-prepared for the downturn.
The US Fed is not interested in raising interest rates because the central bank believes that at present the employment rate is at a worrying level, and the high inflation rate may also be prolonged until next year due to the pandemic. The country needs more time to strengthen in its facets of employment and manufacturing. Therefore, a rise in interest rates could only put more pressure on ordinary citizens, the US Fed does not believe that this will be correct monetary policy. But the reduction is going to take place.
What is taper
The purchase of assets by a central bank to inject liquidity into a country is called quantitative easing, and any reduction in the injection or purchases of liquidity is known as tapering. Powell of the US Fed was confident in the country’s economy by mentioning that the central bank can now reduce the size of asset / bond purchases. This means the United States is recovering from the economic downturn. However, Powell believes the reduction will not disrupt the labor market recovery, as around 5 million people are unemployed, compared to pre-pandemic levels.
Powell mentioned that the Fed is “on track” to start shrinking. Currently, the Fed buys about $ 120 billion per month in mortgage-backed securities from the US Treasury and agencies. The US Fed will meet on November 2-3 for its meeting where it will decide on the reduction schedule and announce the same.
According to reports, the Dow and S&P 500 reversed and the Nasdaq fell more than 1% as Powell spoke of the cut, which previously reached all-time highs. Randy Frederick, general manager of trading and derivatives at Charles Schwab in Austin, TX, told media: “Every time he (Powell) has talked about cutting so far, the markets haven’t. been bothered, but now, at all time highs, investors tend to be just a little more responsive to such news. “
(Read also: The US Fed announces the possibility of tapering at the end of 2021)
Bond and commodity prices
The tapering will certainly have an impact on the commodity markets, in particular the gold market. Gold rates are expected to fall in the coming days as the reduction begins. The US 10-year bond rose about 3 basis points after Powell’s comments on tapering, but then fell to around 1.64%. (Read also : Will gold prices drop soon as the US Fed announces a reduction schedule?)
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