What’s going on?

• The Fed indicated that it’ll start tapering (slowing) its bond-buying program before the end of 2021 – just like investors expected.

What does this mean?

• In 2020, the Fed cut interest rates to near-0% and started buying up $120b worth of bonds/ month. That flood of cheap money actually helped the economy stay alive during the pandemic.
• But investors weren’t wrong to have been expecting the Fed to eventually announce the end of the bond-buying part of the program. The strong economic rebound means the Fed can start reducing its monthly bond purchases before the end of 2021.

Why should I care?

The bigger picture: The rate hike is not that near

The Fed was quick to point out that slower bond purchases shouldn’t be interpreted as a sign of coming interest rate hike, at least not until the labor market is strong enough to hold its own. But with 6m fewer jobs now than there were before the pandemic, the central bank reckons that could take until 2022, if not 2023.

Zooming out: TINA

• One of the reasons the stock market has benefited from the Fed’s bond-buying program is that there is no alternative (“TINA”). I.e, the program has driven bond yields so low that stocks become a much more attractive place to investors.

Ceteris paribus, more bond-buying (mostly from banks) => banks have more money => banks lower interest rates to entice consumers and businesses to borrow and invest

Read more about Fed’s tools in: https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp, https://www.investopedia.com/ask/answers/06/openmarketoperations.asp

• However, the reverse effect takes place when the Fed slows bond-buying, which might turn bonds into an appealing alternative over sky-high stocks.

Content source: Finimize (2021) Called It. Available at: https://www.finimize.com/wp/news/called-it/ [Accessed on Aug 31, 2021]