New York stocks falter as Fed begins tapering (reduction in asset purchases) within the year

The Federal Reserve (Fed) hinted at the possibility of starting a tapering of asset purchases later this year. It is also the day the Fed officially revealed the possibility of a tapering within the year.

The news of the shift from quantitative easing to the New York stock market shook the New York Stock Exchange. According to the minutes of the Federal Open Market Committee (FOMC) on the 27th and 28th of last month, released by the Fed on the 18th, most participants thought it might be appropriate to start slowing down the pace of asset purchases this year.

The Fed has been buying up to $120 billion in U.S. Treasury bonds and mortgage-backed securities (MBS) every month after the coronavirus outbreak last year.

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The view that the size of these asset purchases should start reducing by the end of the year is weighted because the prerequisites for tapering have already been achieved or are about to be achieved.

The Fed said it could taper if it makes “significant further progress” towards its target of 2% average inflation and maximum employment.

“Most participants mentioned that these standards have already been achieved in relation to the price stabilization target,” the Fed said in its minutes. According to the minutes, “the majority of the committee members judged it appropriate to start slowing down the pace of asset purchases this year if the economy improves widely as expected, looking ahead.” The ‘most’ mentioned here is an expression that can be considered as the FOMC has taken the lead in this direction. Consumer price inflation in the US has risen to over 5% in recent months, raising concerns about inflation.

Regarding the employment issue, he said, “Most of the participants judged that the criterion of ‘significant further progress’ towards maximum employment has not yet been met,” he said, “but it could be achieved within this year.”

However, at the FOMC meeting last month, there were no small voices against the start of tapering within the year.

A majority of attendees thought it was reasonable to start tapering “in a few months” given the current economic and financial situation, but several others said that “early next year would be more appropriate,” the Fed said. Members who insisted on starting next year opposed the early tapering, saying that more accommodative monetary policy is needed to recover the labor market.

They emphasized that “employment is much lower than it was before the pandemic.” On the other hand, some objections were raised that aiming to restore employment to the pre-pandemic level “may not be the correct standard” given the changes in the economic structure that the COVID-19 crisis has changed.

Opinions also differed on the outlook for future prices.

Some members worried about the possibility of a lower inflation rate, saying, “Inflation concentrated in a few sectors is unlikely to change the underlying price dynamic enough to overcome the continuing downward trend.” Wall Street believes that in the process of monetary policy change, uncertainty increases and adjustments are inevitable. On the same day, the stock market plummeted by about 1% as soon as the minutes were released.

Despite some disagreements, the New York stock market, which had been waiting on the announcement of the minutes of the Fed’s majority opinion gathering toward the start of tapering within the year, drew a steep downward curve. This is why the New York Stock Exchange is expected to adjust around 10% this fall.

The Dow Jones Industrial Average closed at 34,960.69, down 382.59 points (1.08%) from the previous day. The Standard & Poor’s (S&P) 500 index fell 47.81 points (1.07%) to 4,400.27, and the tech-focused Nasdaq index fell 130.27 points (0.89%) to 14,525.91, respectively. The three major indices closed down for the second day in a row. Until just before, the Dow and the S&P 500 had both hit all-time highs for the fifth straight trading day.

Park Heung-ryul reporter>