Federal Reserve Reduces Economic Support Measures Amid Recovery

It’s been over a year since the entire world ground to a halt as a result of the COVID-19 pandemic. At a time when businesses and governments prepared for economic growth with the coming of the new decade, they were suddenly confronted with a global pandemic. This pandemic brought down the brakes on activities that sustain our economies, creating one of the greatest financial crises in recent history. 

While the mass roll-out of vaccinations have ushered in a sense of a return to normalcy, this return will be marked by numerous difficult tasks. In order to alleviate the economic strain caused by the lockdown, the government has been purchasing bonds and other assets. 

As a result of the pandemic-induced recession, the Federal Reserve began purchasing $120 billion dollars’ worth of bonds monthly. Also known as quantitative easing, the Federal Reserve has essentially been pouring money into the economy as a way to expand economic activity such as borrowing and spending. The Federal Reserve has also kept interest rates near zero. By lowering interest rates, it has become less lucrative to save money that will not be gaining interest, making it a prime time to borrow while interest rates are low. 

Thanks in large part to these initiatives, experts report that the U.S. economy is on track for a strong recovery. Government stimulus and benefits have dramatically increased the average consumer’s disposable personal income. Businesses are bouncing back, economic activity is climbing to pre-COVID-19 levels, and consumer spending is growing rapidly. A lot of this economic support has been spearheaded by the Federal Reserve. Lowered interest rates and heavy spending on government backed bonds have cut interest rates, which in turn has boosted economic activity and growth by encouraging more loans. 

The Federal Reserve announced during a meeting on September 22 that it planned to slow down government backed asset purchasing and raise interest rates by the end of next year. This reflects policymakers’ desires to move the markets off of the government-backed economic support they had been relying on to stay afloat during the height of the pandemic. “They want to start the exit […] They’re putting the markets on notice,” said Priya Misra, global head of rates strategy at TD Securities. 

Other threats to the U.S. economy still remain. The insecurity shrouding the Chinese real estate bubble and prolonged presence of COVID-19 has put the financial market on edge. Rising COVID-19 cases in the U.S. remind us that we are still living through a global pandemic, and that normalcy is still a long way away. Reluctance by some to return to work is also a major influence hindering the recovery of the U.S. economy. In fact, the labor sector has been one of the slowest to recovery, as many employees are seizing the opportunity to define what a post-pandemic workforce will look like. Many Americans are staying home, not because they are lazy, but due to factors such as high childcare costs and the poor job protection that left them unemployed during the pandemic. 

However, many at the Federal Reserve feel that time is of the essence. As inflation reaches the highest it has been in 30 years, many take it as a good indicator that the economy is recovering well and that inflation is projected to shrink back within range by the end of next year. Others are more doubtful, as they worry that inflation will remain elevated due to corporate pricing power and higher consumption rates.

Despite these concerns, however, the Federal Reserve has decided to push forward and reduce asset purchasing. We will have to wait and see if this decision was premature or if it was a difficult, but necessary, measure required to build back the U.S. economy. The Chairman of the Board of Governors, Jerome H. Powell, shared this sentiment on June 16, 2021 when he said that “the process of reopening the economy is unprecedented, as was the shutdown at the onset of the pandemic.” However, if there is anything that this pandemic taught us, it is that across the globe, people are resilient. We will rebuild and we will find our way back to normalcy.

By: Dominique Williams