(WASHINGTON) — It’s been hard for Americans to avoid headlines and statements about “tapering” in recent months, as economists and policymakers debate how to best support the economy while the pandemic ebbs in the U.S.
The Federal Reserve said in a policy statement Wednesday that it was greatly reducing its massive bond-buying program, a pandemic-era initiative that flushed cash into financial markets and aimed to buoy the economy during the health crisis.
In the context of current economic policies, this ongoing process of slowing down asset purchases by the Fed is referred to as “tapering.” Simplistically, it refers to the gradual slowdown of the economic stimulus policy that was initiated at the height of the pandemic, when businesses shuttered and unemployment skyrocketed.
“The Fed has been buying up bonds since March of 2020 — bonds and mortgage-backed securities — at a certain rate, and they’re going to slow the rate at which they’re buying up these assets until they’re not buying them anymore,” Megan Greene, global chief economist at the advisory firm Kroll Institute and a senior fellow at the Harvard Kennedy School, told ABC News.
On Wednesday, Federal Reserve Chair Jerome Powell said during his post Fed-meeting news conference, “We’re basically two meetings away now from from finishing the taper.”
The move to speed up tapering comes as inflation has thrown a new wrench in the Fed’s ability to use its tools to support the economy. Economists have attributed the rising inflation to pandemic-related imbalances as global supply chain snags and labor shortages hobble the ability of supply to keep up with surging demand, pushing up prices.
The Fed’s pandemic policies helped stimulate the economy and consumer demand during the height of the crisis, but the U.S. central bank does not have monetary tools to ease the supply constraints.
“We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support,” Powell said Wednesday. “In addition, a quicker conclusion of our asset purchases will better position policy to address the full range of plausible economic outcomes.”
In addition to doubling the pace of its tapering, the Fed also signaled that it could hike interest rates up to three times in 2022.
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