US Fed Announces The Possibility Of Tapering In Late 2021

Friday, in a virtual meeting to the Kansas City annual Jackson Hole symposium, US Federal Reserve (Fed) Chair Jerome Powell said that they might start to reduce monthly bond purchases, later this year. However, they will not rush to hike the interest rates now. It has been a very significant announcement from the Chair, as industrialists, traders, investors, and economists were eagerly waiting to learn if the Fed is going to change its policy measures any soon. This clarification came with the backdrop of the US's labour data and housing segment data release, recently, revealing the country is recovering from the economic slowdown.

Chair Powell, being confident, has declared that the economy has met the test of 'substantial further progress' toward the Fed's inflation objective, and the labour market has also made 'clear progress'. The policymakers intend to skow purchases before hiking interest rates. Economists are expecting interest rates to rise in early 2022, as inflation is staying above the Fed's target of 2%. "We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time", Powell stated. The Fed thinks that the present inflation status is transitory and it "is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy", that will dissipate.

Earlier, the Fed started to hike the pace and scale of bond and crisis-era asset-buying programme, cut its benchmark rate to nearly zero, due to the economy slowing during the pandemic. The Fed was continuing with a $120 billion-a-month bond-buying programme, which is considerably high. Loans were easier to get with better interest, for common citizens. It aimed to provide economic stimulus and more liquidity in the system which is a precondition for tapering the bond-buying programme or quantitative easing (QE) in a country. Now, the Fed is ready to reduce the amount of money it was feeding into the economy, in later 2021.

According to some industry insiders, the economy is ready for tapering now and the market will show positive reactions, while the government bond yield is not surging uncontrollably. Although, increasing cases of Coronavirus delta variant will not probably allow the Fed to hike interest rates very soon. Chair Powell added, "The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant. We will be carefully assessing incoming data and the evolving risks."

Earlier in July Chair Powell had also mentioned, "If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year". So, Friday's declaration by Powell will help investors to decide about their further investment portfolio, will help the US dollar index to rise in the international market. However, this might drag down gold prices later this year or in early 2022, shifting investors' focus from gold to the US dollar again. But at present, the yellow metal might maintain its strength, moderately.