The Fed rolls back economic stimulus

The Federal Reserve is set to reduce the massive monthly asset purchases that supported the economy throughout the pandemic. CNN's Matt Egan report

Posted: Nov 4, 2021 8:36 AM
Updated: Nov 4, 2021 10:00 AM


It's official: The Federal Reserve is winding down its aggressive pandemic-era stimulus measures, a process Wall Street nerds call "tapering." But what, exactly, does that mean?

The short answer: Money has essentially been free for the past year and a half, thanks to the Fed's double-barrel shotgun approach to economic stimulus — interest rates near zero and a massive investment in bonds that keeps yields near rock-bottom. When the Fed eases off the stimulus pedal, borrowing could grow more expensive, making businesses pay more, which means less profit, which means Wall Street is...sad.

For a more in-depth answer, read on!

While it might sound somewhat academic, the results of the Fed's decision could have a huge impact on everyday people, especially those looking to buy a home or run a business.

The coronavirus crash

To understand how we got here, let's flash back to March of 2020, when Covid-19 landed like a bomb on US shores. Businesses shut down, at least 20 million people lost their jobs in a single month, and Wall Street was in full-on panic mode. In just under a month, the S&P 500 -- the broadest measure of Wall Street -- lost more than 30% of its value. If you were brave enough to peek at your retirement account during that time, it was a grim sight.

As Congress bickered over what to do, the Federal Reserve essentially threw itself on top of the Covid bomb to prevent a total financial and economic collapse. It did that by buying government-backed debt — lots of it. Without getting too in the weeds about the Fed's balance sheet, the thing to understand here is that a big part of the central bank's job is to ensure stability, and it does that by controlling the amount of money sloshing around. By buying up debt, the Fed was essentially turning on a money spigot.

And it has been keeping that up ever since, to the tune of about $120 billion a month in Treasury bonds and mortgage-backed securities.

With that supply of easy money, investors came back from the brink in the spring of 2020. By April of that year, the stock market began to rebound, even as the broader economy faltered and the public health crisis worsened. That disconnect between Wall Street and Main Street persists in part because the Fed has kept interest rates near zero and assured investors it would continue its easy-money policy for as long as needed to get the economy back on track.

Pumping the brakes

Those debt purchases were emergency measures implemented to stave off calamity, and were always expected to be rolled back once it was clear the economy had enough momentum to recover from the short-lived but severe pandemic recession of 2020.

The good news is the economic recovery is chugging along as more people get vaccinated, return to work, and in many ways are resuming their pre-pandemic lives. That means it's time for the Fed to wind down, or taper, its debt purchases.

It's a delicate process, and Fed Chairman Jerome Powell has until now been cautious, and at times cryptic, about how and when the taper might begin. Slamming the brakes would trigger an investor panic, but not slowing down would fuel inflation.

Avoiding a 'taper tantrum'

The Fed is clearly trying to avoid a repeat of the so-called taper tantrum of 2013.

At that time, the Fed triggered a panic by merely mentioning its plans to eventually scale back its Treasury bond purchases — a policy known as quantitative easing, or QE, which is just a fancy way to say pumping cash into the economy. The Fed began its QE policy in response to the 2008 recession, and investors got accustomed to the easy money.

At the time, the mention of a future taper caught bond investors off guard, and they began selling en masse. Bond prices plummeted, which meant yields (which move inversely to prices) shot up.

High yields on bonds lead to higher mortgage rates. They make it more expensive for businesses to grow by taking on debt. That's very bad news for an economy in recovery, and exactly the scenario the Fed has sought to avoid this time around.

What happens now?

The Fed announced Wednesday it would start reducing asset purchases by $15 billion a month, starting this month. If it keeps up that pace, the program would end fully by the middle of 2022.

That news should come as no surprise to Wall Street, as the central bank has been signaling to investors for months that it would do just that before the end of the year.

There was no immediate "taper tantrum" in the market following the Fed's announcement: In fact, the major stock indexes inched higher Wednesday afternoon, though stocks were moving only in modest ranges.

By removing some emergency support for the economy, the Fed hopes it can get high inflation under control.

The Fed will maintain its target interest rates near zero. And it said it's ready to slow the pace or reverse its tapering if the economic outlook changes.

— CNN Business' Anneken Tappe contributed reporting.

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Indiana Coronavirus Cases

Data is updated nightly.

Cases: 1490496

Reported Deaths: 20500
CountyCasesDeaths
Marion2039162521
Lake1001941500
Allen923541011
Hamilton72207547
St. Joseph64053755
Elkhart48903625
Vanderburgh47506523
Tippecanoe43182336
Johnson37906521
Hendricks35984459
Porter34277466
Madison28722537
Clark25552325
Vigo25251344
LaPorte23269307
Monroe22751244
Howard21818377
Delaware21391366
Hancock18487220
Bartholomew17860213
Kosciusko17769201
Warrick16642213
Wayne16062300
Floyd15640257
Grant15143296
Morgan14245231
Boone13388136
Noble11656140
Dearborn11560112
Henry11546201
Shelby11483150
Marshall11258167
Dubois11123152
Jackson10425104
Cass10121142
DeKalb10101129
Lawrence10082220
Huntington10016139
Gibson9415125
Montgomery9153141
Knox8942124
Harrison8874112
Whitley861871
Steuben8488104
Jasper8192114
Clinton810295
Putnam806199
Miami8032133
Jefferson7773124
Wabash7726139
Ripley7118112
Adams6595101
Daviess6455127
Scott638586
White613282
Greene5999112
Clay597573
Wells5902120
Decatur5885119
Jennings586278
Fayette5735121
Posey543448
LaGrange524197
Randolph5027129
Washington494368
Owen491499
Fountain472479
Spencer446556
Starke438686
Sullivan437465
Fulton431891
Orange420882
Jay409764
Rush403937
Carroll377549
Perry376755
Franklin375850
Vermillion352062
Parke319238
Pike316245
Tipton313774
Blackford271755
Pulaski270874
Newton231561
Brown226754
Benton215721
Crawford215131
Switzerland194214
Martin186722
Warren174821
Union165519
Ohio122616
Unassigned0739

Ohio Coronavirus Cases

Data is updated nightly.

Cases: 2439205

Reported Deaths: 31245
CountyCasesDeaths
Franklin2637212065
Cuyahoga2582743018
Hamilton1696091714
Montgomery1126771604
Summit1074271391
Lucas909371160
Butler80397942
Stark754911400
Lorain63313792
Warren51040475
Mahoning50162915
Lake47051605
Clermont44631429
Delaware39611212
Trumbull38910755
Medina37850419
Licking37593408
Fairfield34482334
Greene32823422
Portage31698360
Clark30769445
Richland28751423
Wood28217297
Allen24942395
Miami23274395
Muskingum22683245
Columbiana22370403
Wayne21565356
Tuscarawas19096427
Erie18282222
Ashtabula18102342
Marion17861232
Scioto17031207
Ross16556252
Pickaway15812178
Hancock15561228
Geauga15320223
Lawrence14172186
Union1359984
Huron13584182
Belmont13554247
Jefferson13090258
Sandusky12933199
Athens12126106
Knox11721198
Seneca11631200
Darke10950198
Ashland10916178
Washington10729168
Auglaize10364142
Crawford10062175
Shelby9961157
Brown9610140
Fulton9453150
Guernsey9304117
Highland9215148
Defiance9209135
Logan9114142
Clinton8950127
Mercer8816111
Madison8730106
Preble8145162
Williams8014135
Putnam7863135
Ottawa7752121
Champaign7696112
Jackson7510117
Perry725998
Coshocton7137136
Morrow706382
Fayette678287
Pike632586
Hardin6311128
Gallia605891
Adams5913124
Van Wert5877121
Henry577093
Hocking5634104
Carroll4877100
Wyandot487590
Holmes4787161
Paulding409064
Meigs380473
Monroe303368
Noble285051
Harrison284461
Morgan280348
Vinton245145
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