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The Fed has entered one of the most-difficult phases of its pandemic response as it begins to dial back stimulus measures even before the full effects of its policies are felt and amid new risks. Read the latest Markets in a Minute for a look under the monetary-policy hood and the implications for the markets and the economy.
Markets in a Minute: Quantitative Easing
As the Federal Reserve Bank begins to dial back its pandemic-era stimulus measures, the risks of a policy misstep increase. But the central bank seems keenly aware that it must pull off a careful balancing act.
At the start of the pandemic, the Federal Reserve resuscitated a powerful (and relatively new) monetary policy tool — quantitative easing. What is it and how does it work?
As a monetary policy tool, QE is a fairly new experiment, first used by Japan in 2001. It wasn’t until the global financial crisis struck in 2008 that some of the world’s largest central banks embraced QE after other expansionary policy tools (think ultra-low, short-term interest rates) had reached their limits:
What’s next for the Fed’s stimulus programs?
How will today’s tapering and any subsequent rate hikes affect the U.S. economy and the markets?
As they begin to withdraw stimulus, Fed officials are bound to feel as if they’re piloting a freighter. Changing tack (or shifting policy) is certainly harder than doing more of the same given the higher degree of uncertainty. Yet the central bank must often change course before the full economic impacts of its policies are felt. Sudden moves or miscalculations may trigger volatility, as the Fed learned in 2013. But so far, the central bank seems committed to a market-friendly approach. Earlier this month, the White House also gave investors a sense of stability when it nominated Powell for a second term.
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