With the Federal Reserve beginning to reduce its holdings of more than $8 trillion in assets including Treasurys and mortgage-backed equities, what does this mean for markets and what significance does this move have?
We had recently heard about the Federal Reserve’s tendency to reduce its holdings of bonds and assets by more than eight trillion dollars, which was actually clear from the Board’s meeting last March, as it will begin to reduce about one trillion dollars each year from these assets.
But what does that mean? Why is this important and is moving the markets now and raising the dollar against other currencies?
Why is the Fed’s holding of assets important?
We’ll go back here to the years of the financial crisis 2007 to 2009 when the Fed first began using large-scale asset purchases, also called quantitative easing. During the crisis, it became clear that simply cutting interest rates to stimulate the then collapsing economy was no longer enough.
The intervention of the Federal Reserve by simultaneous purchase of tens of billions of dollars of Treasury bonds issued by the US government, and the purchase of shares on mortgage-backed exchanges, quickly helped reduce the long-term borrowing costs of companies and individuals, thus promoting economic recovery.
How did the asset purchase program go?
The central bank implemented three waves of buying programs between 2008 and 2014, the Fed holds nearly $4.25 trillion in bonds, and the yield on 10-year US Treasuries has fallen, which has an impact on interest rates on everything from auto loans to mortgages. real estate, from more than 4% to much less than 2%.
Why did the central bank keep buying assets?
Next came the Corona crisis in early 2020, and what we know caused a panic in the financial markets, and the Federal Reserve responded once again with massive bond purchases as well as interest rate cuts.
Its total bond holdings are now about $8.3 trillion, with roughly $5.65 trillion in Treasuries and $2.65 trillion in mortgage-backed stocks.
Why does the Fed want to sell assets so quickly now?
Federal Reserve officials now say the US economy is much stronger than it was during the financial crisis.
But the most important reason for them is the inflation that jumped hysterically in the Corona years because of what we know about the disruption of supplies and the shortage of goods and the increase in their prices, then now came the Russian war, which made matters worse, so the “reserve” now focuses on fighting inflation and does not care about the growth of the economy, So we saw him last month raise the interest rate by a quarter of a percentage point, and he is expected to raise it by half a percentage point at its next meeting, with a quick start to sell the assets he owned at a rate of $95 billion per month for both bonds and stocks, and we began to see the impact of this in a strong decline in American stock exchanges this week as a result that.