The U.S. Bond-buying Program Ends To Inflation?

The Bond-buying stimulus program known as quantitative easing, helps stimulate the economy since it keeps yields on government bonds low. Also it makes borrowing cheaper because all kinds of consumer and business interest rates are pegged to what’s happening in the bond market.

Recently The Federal Reserve, the U.S central bank, reported they will slow down this program and end it by next summer and perhaps start raising its benchmark interest rate. The bank said it will start by reducing its monthly 120$ billion US bond purchases to 15$ billion a month, the bank added, all rights to change the pace are reserved by itself.

The Federal Reserve says its pace of buying U.S. government debt will reduce from $80 billion US a month down to $70 and then $60 until it gets to zero. Also it is cutting its $40 billion US in mortgage-backed securities by $5 billion US in November and December. In the following months similar cut backs may apply as the bank stated more reductions might be appropriate. It implies that the central bank might decide to speed up its pullback in bond-buying if inflation could exacerbate.

If all the programs continue at this pace, it will end by June 2022, and the next logical step for the Federal bank is to raise its benchmarks which is its main tool to control the inflation.

In similar programs around the world, Canada for example, brought its bond buying program to an end this month but the U.S statement is more open in ways.

As the U.S has started the program later than other countries the question comes to mind whether the Fed is making a mistake or not? Changes means that the central bank is rapidly shifting from an encouraging economy to one that mitigate rising inflation. The Fed might want to keep their benchmark short-term interest rate at nearly zero, where it has been pegged since last March, to boost the economy, but they are facing growing pressure, including from Republican lawmakers in Congress, to rein in rising prices.

The policy makers around the world¬† have tried to argue for months that those factors won’t be permanent, but the longer high inflation continues, the harder it is to claim that it isn’t becoming a more permanent problem.

If the Fed doesn’t start raising its lending rate until almost a year from now, Canada will be in the unusual situation of having to raise its lending rate while its biggest trading partner is not doing the same.


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