In an effort to remove the U.S. economy from its previous economic lull, the Federal Reserve began purchasing government bonds to the tune of approximately $85 million a month. In doing so, officials hoped to retain low interest rates while simultaneously encouraging borrowing and investing. Their efforts have been successful, as our economy appears to be on a sustainable track to recovery.
However, it has been announced that these purchases will begin to unwind. Accordingly, the nearly $85 billion that the Federal Reserve is currently spending every month on mortgage-backed securities will begin tapering as soon as this week. Some economists fear that we may face significant repercussions from their withdrawal.
When implemented, the easy money policies prevented rate hikes, but news of the cutback may be responsible for the exact opposite. Rates are already on the rise and are expected to continue in that direction. Some analysts fear the tapering of these purchases will cause the current recovery to falter.
“Despite assurances that the stimulus would be withdrawn gradually and that interest rates would not rise any time soon, investors have been pricing in a turning point in the financial cycle,” Reuters reports. “If yields shoot even higher after this week’s Fed meeting, confidence will be rattled, the already feeble housing-driven U.S. recovery could stumble and investors in emerging economies might again start rushing for the exit.”
More than 60 percent of the 44 economists surveyed in a USA Today Poll say Fed policymakers will dial back their $85 billion in monthly government bond purchases when they meet Tuesday and Wednesday of this week. Those familiar with the situation expect Fed to reduce their spending by $10 billion to $15 billion.
According to sources, the talk of cutbacks originated from the fear of potential risks, not because of the return of the economy. More specifically, the risks of the stimulus plan are starting to outweigh the benefits. Officials believe the stimulation may begin weakening the economy.
Conversely, these reports coincide with a promise to keep the short-term federal funds overnight rate close to zero until unemployment rates reduce significantly.
Since the Fed began buying longer-term Treasury bonds and mortgage-backed securities a year ago, the unemployment rate has fallen to 7.3% from 7.8%. The program has also sparked strong trends in the stock market, but raised concerns such as eventual high inflation.
“When they started, they were worried that (economic) growth was very weak and the unemployment rate was starting to rise,” says JPMorgan economist Robert Mellman. Now, he says, the jobless rate “is actually coming down fairly quickly.”