Real GDP actually fell by just 2. This growth, along with the currently elevated levels of inflation, has led the FOMC to evaluate the eventual tapering of asset purchases and raising of interest rates. Distinguishing short-term interest rate policy from tapering has been a communication challenge for the Fed dating back to the taper tantrum. This time, the FOMC has repeatedly indicated that tapering will precede any consideration of rate hikes.
There is evidence to support this idea: a study by Fed economists found that the size of the balance sheet is more important than the pace of purchases in lowering long-term yields. However, long-term rates also reflect market expectations about the course of short-term rates. Since tapering can signal to markets that the Fed is shifting to a less accommodative policy stance in the future, this could lead to a rise in long-term rates as occurred during the taper tantrum. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.
Powell expanded on this statement at the post-meeting press conference , indicating that the Fed would likely move ahead with tapering as soon as the November FOMC meeting. Unlike during the taper tantrum, markets reacted positively to the news from the September meeting, with stock indices reaching intraday highs and the year Treasury yield rising only slightly from 1.
Editor's Note: This post was updated on August 30 and September 28, What more could it do? Related Topics U. More on U. The Avenue The monthly jobs report ignores Native Americans. How are they faring economically? The U. The Fed then tightened monetary policy for a couple of years.
Then, in , during the economic crisis, the Fed reverted to loose credit policy, lowering the benchmark rate to 0. These periods of loose credit were intended to encourage lenders to lend and borrowers to take on more debt. In theory, this should also lead to increased asset prices and spending on goods and services as the newly created money and credit enters the economy. From to , the Fed began gradually tightening monetary policy again in very small increments. The Fed then began loosening policy again, dropping rates through the second half of in the hopes of avoiding a recession.
On top of this, with the onset of the government shutdown of huge parts of the world economy in , the Fed kicked off a new round of extremely loose money and credit policy in an attempt to buffer some of the ongoing economic damage and support the new programs authorized under the CARES Act. Board of Governors of the Federal Reserve System.
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