Daily Column – 3rd November 2021

The Federal Reserve said later in November that it will begin lowering its asset purchases by $15 billion per month, marking a critical milestone in the US’ recovery from the economic crisis due to the Covid-19 pandemic.

Investors expect the Federal Reserve to begin raising interest rates, which are now around zero, when the programme expires next summer. There were no rate hikes announced yesterday.

How did we end up here?

The Fed launched in April 2020, a $120 billion-per-month bond-buying programme aimed at keeping borrowing costs low and assisting consumers and companies in weathering the economic storm. This initiative, along with other government relief efforts, have kept the economy afloat and are credited with catalysing a faster-than-expected economic recovery.

However, when the economy recovered its footing, a new threat emerged: inflation. A slew of issues, including supply chain bottlenecks and soaring consumer demand, have pushed prices higher than the Fed, or basically anyone who goes shopping, would want.

  • Consumer prices rose 4.4 percent yearly in September, compared to the Fed’s aim of 2%.
  • As of last Saturday, the average price of gasoline in the United States was $3.40 per gallon, up from $2.14 a year ago.
  • Concerned that increased inflation could become its own burden on the economy, financial institutions have opted to reduce support and hope that prices return to normal.

The Great Unwinding isn’t a solo album from the United States. As the global economy recovers and inflation becomes a worry, central bankers from Canada to Australia have already moved to reverse their pandemic-era stimulus measures. Following the recession, the Bank of England may become the first major central bank to hike interest rates.

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