US Is Ready For Tapering, But Not Interest Rate Hike: Fed's Jerome Powell, Wall Street Indexes Went Down

Federal Reserve Chairman Jerome Powell has officially announced that the US economy is ready for reducing the asset purchases by the US Fed, however, he does not think that it is a good time to hike the interest rate. Powell said at a virtual meet before a conference, "I do think it's time to taper; I don't think it's time to raise rates. We think we can be patient and allow the labor market to heal. Our policy is well-positioned to manage a range of plausible outcomes."

At the event held by the South African Reserve Bank, Jerome Powell also commented, "No one should doubt that we will use these tools to guide inflation back down to 2% over time. At the same time, we think we can be patient and allow the recovery to take place and allow the labor market to heal." Powell also thinks that the market is not unprepared for tapering.

The US Fed is not interested to hike the interest rates as the central bank thinks, at present, the employment ratio is at a concerning level, and the high inflation rate also can be extended till the next year due to the pandemic. The country needs more time to get strength in its employment and manufacturing facets. Hence, an interest rate hike could only pressurize the common citizens more, the US Fed does not think it will be a correct monetary policy. But tapering is going to take place.

What is tapering

Asset purchase by a central bank to infuse liquidity in a country is called quantitative easing, and any reduction in the liquidity infusion or purchases is known as tapering. The US Fed's Powell sounded confident about the country's economy that he mentioned that the central bank can now reduce the size of asset/bond purchases. That means, the US is recovering from the economic slowdown. However, Powell thinks that tapering will not disrupt the recovery in the labor market, as around 5 million people are out of work, compared to the pre-pandemic levels.

Powell has mentioned that the Fed is 'on track' to begin tapering. Presently, the Fed is buying about $120 billion a month of the US Treasury and agency mortgage-backed securities. The US Fed will meet on November 2 and 3 for their meeting where they will decide the tapering timeline and will announce the same.

Indexes

According to reports, the Dow and S&P 500 reversed course traded down, and the Nasdaq dropped more than 1% as Powell spoke about tapering, which was earlier running at record highs. Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, Texas told media, "Every time he (Powell) has been talking about tapering so far, markets haven't been bothered by it, but now at record highs investors tend to be just a little bit more sensitive to such news."

(Also read: US Fed Announces The Possibility Of Tapering In Late 2021)

Bond price and commodity

Tapering will certainly impact the commodity markets, especially on the gold market. Gold rates in the upcoming days are expected to fall, as the tapering will start. The US 10-year bond increased around 3 basis points after Powell's comments on tapering but later dropped to around 1.64%. (Also read: Will Gold Prices Fall Soon As US Fed Announces Tapering Timeline?)