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Federal Reserve Bank announces asset purchase slowdown. Stocks react

Written By | Nov 3, 2021
Federal Reserve Banks, Fed SLR

US Federal Reserve Bank in Washington, D.C. US government photo. Image in the Public Domain.

WASHINGTON – Wednesday afternoon, the US Federal Reserve Bank announced its long-anticipated slowdown of the central bank’s lengthy program of stimulative asset purchases. The original purpose of this program was to provide enough funds to get businesses rolling again while compensating American workers for lost jobs and suspended salaries. All resulted from the government’s overly prolonged “emergency” effort to slow the spread of Covid-19. Stocks reacted modestly, despite another swing of America’s investing pendulum.

Given the recent semblance of a return to economic “normalcy,” and fearing an increase in America’s already unacceptable rate of inflation, the Federal Reserve aims to start delivering on its promise to start taking away the stimulative punch-bowl beginning in December 2021.

The Fed describes its latest move in FedSpeak

The Fed described this gradual move in FedSpeak, its typically obtuse Washingtonspeak-style prose. They revised their previous policy remarks today to read, in part, as follows.

“In light of the substantial further progress the economy has made toward the Committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities….




“Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

In other words, the Federal Reserve Bank Open Market Committee (FOMC) noted that its highly stimulative monetary program, which essentially added massive amounts of liquidity to the US economy to compensate for the loss of wages, goods and services during the now-ended Covid pandemic via massive purchases of bonds and debt needed to gradually recede. Part of the reason for this was – and is – the substantial price inflation the stimulus plan, including artificially low interest rates, continued to exacerbate.

Say goodbye to the government’s latest fiscal punchbowl

By pulling away the stimulus, the Federal Reserve Bank intends to slow inflation essentially by allowing interest and borrowing rates to gradually rise. At least that’s the intent.

Market-wise, investors holding banking and financial stocks may finally benefit as these institutions finally begin to enjoy an ability to raise interest rates on everything ranging from credit cards, to personal loans, to real-estate purchase and refinance loans, thus enabling their profits to increase.

In the meantime, consumers, already squeezed by serious inflation that has caused everything from grocery prices to gasoline prices at the pump to skyrocket, could see an easing in these massive price increases. At the same time, however, given the inevitable rise in interest rates, home purchase loans may put housing out of reach for the average family in coming months.

All good things come to an end. But there are always consequences…

Like the ongoing, now massively overdone Covid pandemic panics, the stimulus game had to come to an end. But as it does, an entirely fresh set of challenges will confront investors and consumers alike as they, like prices and product availability, will need to adjust.

US stocks continue to trade mostly flat to up Wednesday afternoon as markets near the final hour of trading. Bonds and preferred stocks continue to trade slightly off, a typical reaction to impending interest rate increases. However, precious metals, like gold and silver – along with gold and silver ETFs – continue trading down, adding to Tuesday’s slide. Precious metals generally appreciate during inflationary bouts but tend to pull back when anticipating any cooling of inflation. That’s what today’s change in Federal Reserve policy direction certainly implies.

Other sectors remain indecisive. But construction and infrastructure issues look wobbly. This is at least partially a result of Tuesday’s off-year election results. Worries primarily involve  Virginia. But they also affect other select areas of the country that turned away from Democrats. The apparent GOP sweep in the Old Dominion implies an increasingly serious lack of public support for the Democrats’ risky, discriminatory and highly inflationary socialist “infrastructure” and related spending schemes. All are related to the Biden junta’s risky “Build Back Better” scheme. At taxpayer expense, of course.

Add current politics to current monetary policy, and we may have market “issues.”

Add this election setback for the left-wing Democrats to the Federal Reserve Bank’s gradual punchbowl withdrawal. Now you have a recipe for scaring away bullish investors in various infrastructure stocks.

We may likely have to wait until at least Thursday to better assess stocks and investment sectors. Objective? Which ones are worth holding onto over the next 3 to 6 months.



Stay tuned.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17