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- Scoop Market Mysteries 11-7 (Fed's Tapering Now)
Scoop Market Mysteries 11-7 (Fed's Tapering Now)
🔎 Market Mysteries: What is the Fed tapering and why is it a good thing now?
Market Mysteries of the week
What is the Fed tapering and why is everyone cool with it now?
Answer: The Federal Reserve is tapering, or reducing, its monthly stimulus measures because it believes the economy’s far enough along on the road to recovery.Who’s the Fed, and why should I care?The Fed, aka the Federal Reserve, aka the Central Bank, controls our whole money system. It is responsible for stimulating the economy when it’s struggling and moderating it when it starts to overheat. It regulates this metaphorical temperature of the economy with two main tools:First, the Fed sets baseline interest rates for all of the banks. So when the economy is struggling, like it has been this past year and a half, it lowers the baseline rate to 0%. That leads the banks to lower their interest rates on everything from savings accounts to loans. Lower interest rates on our credit cards, mortgages, or auto loans make it easier to spend. Lower interest on our savings accounts makes it less attractive to save. It works the same way with corporations as well. Lower interest rates stimulate spending and investing.The second major tool it has is printing money. It’s not physically printing dollar bills. It increases the amount of money in circulation to make sure the financial pipes keep flowing. It “prints” money by purchasing stuff with money that the Fed essentially speaks into existence. For example, it buys US government bonds from banks and institutions, holds onto the bonds, and the banks then get to lend out this new money they got in exchange.What is the Fed up to now?The Federal Reserve announced Wednesday that it will officially start tapering off its monthly bond purchases. It’s been buying $120B of bonds each month, speaking that money into existence, pumping billions of new dollars into the financial system. It will be reducing that amount slowly each month, likely completely stopping the purchases sometime next summer. All that new money has been key to ensuring banks have enough capital to lend to people and businesses when they need to support or expand their operations, but it has also raised concerns about inflation. If there’s more money in your wallet, it’s easier to pay up for the things you need and the things you want, including stocks and real estate. So it’s a delicate balance of stimulating economic activity without doing too much.The stimulus isn’t fully over, though. The Fed is winding down the purchases cautiously and could change course anytime. It also expressed the intention of keeping interest rates low, the other main component of stimulus.Weren’t people worried about this happening not long ago?Yes, but now they’re not. Investors were worried that these unique pandemic-related inflation spikes would force the Fed to end the stimulus before the economy was actually healthy enough to stand on its own. But now, the jobs market is showing strength and corporate profits have stayed resilient against supply chain disruptions. Unemployment and inflation are the two biggest considerations for the Fed’s stimulus decisions. The Fed wants to help the economy achieve full employment without letting inflation get too high. Inflation is its best temperature gauge. Low inflation is a sign of a healthy, growing economy because if things consistently got consistently less expensive, we would be incentivized to delay spending, and the economy would struggle. The Fed targets about 2% inflation. But if prices rise too quickly, that means there are imbalances or supply shortages in the economy, or there’s just too much spending and demand for the given available resources. When inflation is too high for too long, the Fed has to step in to slow things down. It will raise interest rates and reduce the money supply. So far, the Fed’s assured everyone that it thinks the current inflation spikes will be short-term.Should I be worried about the economy?Not yet. Given that the global economy just tried shutting off and then back on for the first time ever, we’re showing solid signs of recovery. It would probably be weirder if everything was back to normal already. Even though it’s riskier riding with the training wheels off, it’s a good sign that we now think we’re ready for it.Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team
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