On Wednesday, the Federal Reserve held an important meeting regarding tapering the pace of its monthly bond purchases. During the meeting, Fed chair Jerome Powell announced the central bank would begin tapering later this month. The Fed said they’re starting to taper next month because the economy has made substantial progress towards their goals.
While the Fed announced they’d taper soon, they decided not to raise interest rates anytime soon. The relationship between interest rates and tapering is critical. The Fed emphasized that the reduction in asset purchases should not be interpreted as a hint that rate hikes are on the way.
Investors weren’t surprised by the announcement as the markets finished the day green. The Fed has been signaling for quite some time that it would taper its asset purchases soon since the economy has recovered significantly since the start of the pandemic.
Along with the taper, the Fed also changed its view on inflation, conceding that price increases have been faster and more long-lasting than forecasts anticipated. However, despite acknowledging the rising inflation, they still maintained their controversial term “transitory.”
The Fed loves to use ambiguous language, so they won’t shock the markets. What does transitory even mean? Everything in life is transitory — nothing is permanent! Would you call the nine-year hyperinflation in Weimar Germany transitory? Because of these rapid and consistent price increases in the economy, many investors expected the Fed to do away with the word.
If supply chain bottlenecks persist, Fed chair Jerome Powell anticipates inflation to rise until mid-2022. So, let’s check back in mid-2022 and see if the inflation was all “transitory.”
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.