Federal Reserve to scale back bond buying, look to boost interest rates for 2022

 

WASHINGTON, D.C. – The Federal Reserve is announcing they intend to taper their purchases of bonds and mortgage-backed securities to help reduce the liquidity of the markets and cool off inflation.

The measures are intended to reduce unemployment to pre-pandemic targets of 3.5 percent according to Federal Reserve Chairman Jerome Powell, with interest rates set to be increased once those targets are reached, and at least 3 times during 2022.

“It’s a trifecta of too much money in the system, fewer people working driving up wages, and increased demand with reduced supply pushing up prices, so I think the Fed should have been more aggressive, their projections were wrong and they are trying to correct it,” said Salisbury University Finance and Economics Professor Leonard Arvi.

Arvi tells us that the Fed had been keeping interest rates low and lending high for at least a 10 year period since the recession of 2008, with those efforts being further expanded during April of 2020 to help the economy stay afloat during the height of the pandemic. Arvi tells us those measures are partly to blame for the current rising of inflation and tight labor market, but he believes a divestment by the Fed may still not be enough to curb inflation in the short term.

“Inflation is here to stay, they are late to the game and working to correct it,” he said.

According to Salisbury Chamber of Commerce President Bill Chambers, those measures may have made sense in the beginnings of the pandemic, especially with low-interest rates creating historically cheap debt that incentivized businesses to take out loans, invest and expand businesses to fit a pandemic model.

However 22 months into the pandemic he says circumstances have changed.

“There’s just too much money in the market right now that’s what has driven these knee-jerk reactions and inflation and The Fed by raising rates is hoping they will stabilize the market and they’ll see inflation level off and slowly drop,” Chambers said.

Chambers tells us that with a 7 percent rate of inflation, the diminished purchasing power for businesses and consumers is offsetting any gains they might now make with cheap debt and borrowing on loans. He says many businesses are already leveraged as far as their pocketbooks have allowed, and are only being hit with more expensive labor and supply shortages amid increased demand.

“Construction, manufacturing, hospitality, and smaller retail they are still not where they want to be,” Chambers said.

Professor Avri tells us higher rates won’t hurt the businesses that can still stand to take on more debt, and that a 1.5 percent increase as proposed by the Fed, is still modest compared to where levels have been in the past. He tells us that even with companies offering pay raises for workers, with inflation rising many workforces are effectively taking a pay cut, especially harmful for those on a fixed income.

“You are looking at a bump of 1.5 percent next year but if inflation is running at 7 percent the real interest rate is actually negative 5.5 % so if you are a senior citizen on a fixed income your purchasing power goes down your becoming poor,” he said.

They say the era of record-low financing is going away, but those who would stand to benefit should take advantage, by refinancing, consolidating debt, or paying out annuities before the rate increase.

While the measures won’t make inflation disappear overnight, Bill Chambers says the goal is to get job numbers up and have inflation under control.

“Let’s have the inflation follow the growth that’s what has not happened in 2021,” he said.

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