Jerome Powell, Chairman of the Federal Reserve, US officials stated that the central bank will start tapering their asset purchases volume as they are thinking the economy is on the verge of recovery. Currently, they are buying bonds and mortgages worth at least $120 billion per month. The upcoming will reduce the size by $15 billion per month; $10 billion from its purchases of Treasury securities, and $5 billion from its purchases of agency mortgage-backed securities.
Maximum employment and price stability will be the key to the Fed's monetary policy. Now, the economy is recovering and Powell has decided to slow down the pace of asset purchases. High inflation is another concern for the Fed, but they are targetting to keep the inflation rate at 2%.
Economic activities have expanded at a 6.5% during the first half of this year in the USA; the vaccination drive helped to reopen the economy. However, in the third-quarter GDP growth has declined from previous quarters, as the delta variant, Covid virus emerged. Sectors like travel and leisure were affected mostly by this.
Powell has mentioned in his statement that supply constraints and bottlenecks have been a major challenge, notable in the motor vehicle industry. Business investment and household spendings also flattened in the last quarter. "In August and September, job gains averaged to 280 thousand per month, down from in average 1 million jobs per month in June and July," he said. the labor market remained soft.
Reaction on the market
As an immediate reaction to the market, Wall Street stocks increased to record highs while Treasury prices slipped as the Fed confirmed the tapering timeline. Additionally, the S&P 500 also gained after the Fed's announcement. Earlier, after Powell's comments, the market got triggered. This time he mentioned, "we wouldn't want to surprise markets" and would provide ample warning ahead of any change. Also, the Fed is not hiking the interest rate soon.
Financial Time earlier reported, "The 2-year US Treasury yield, which moves inversely to the price of the debt and tracks interest rate expectations, hit an 18-month high of 0.55% last week. The current fed funds rate is marginally higher than zero. The yield on the US's benchmark 10-year Treasury note climbed 0.05% points to 1.60%. This important debt yield, which underpins government, business, and household borrowing costs worldwide, has climbed from about 0.9% at the start of the year. Higher yields reflect lower prices."
In addition to that, the asset markets, especially gold markets reacted negatively. International gold rates went down to $1763/oz at the Comex.