News: The Fed Taper Is Coming. Here’s What to Expect

During the economic recovery after the COVID-19 pandemic began, the Federal Reserve began purchasing billions in U.S. Treasuries and agency mortgage-backed securities. These purchases showed the Fed’s support of the economic recovery, helping keep interest rates down and purchasing steady. 

The results were a relative success, and now it’s time for the Fed to begin what’s called a taper. This is when the Fed slows its purchasing of U.S. Treasuries and agency mortgage-backed securities to stave off potential further inflation. 

Starting this year, the Fed will slow its purchasing pace, which currently sits at $120 billion per month, by $15 billion per month. This should bring the purchasing to a complete stop by mid-2022. The Fed did say it’ll adjust the taper as needed. 

Let’s explore what this taper means for you and your finances. 

Why taper now?

The purchasing of these assets was never supposed to be permanent, but the timing of the taper is for a good reason. Fed Chairman Jerome Powell noted he is satisfied with the country’s strides in employment and price stability, passing the first of the Fed’s tests. The other part of the test is inflation, which is currently higher than the Fed likes. 

With these tests passed, the Fed is confident in the economic recovery, and slowing asset purchasing will help bring spending back to normal and ease inflation. 

How will the taper impact the economy?

Though the Fed says the taper will have no direct implications on short-term borrowing costs — the Fed interest rate — others aren’t buying it. Other Fed officials have a different opinion, guessing there will be rate hikes through 2024.

The current Fed rate sits at 0% to 0.25%, and some officials anticipate three rate hikes between 2023 and 2024. These hikes would bring the Fed’s benchmark borrowing rate to 1.75% to 2%. 

This would likely cause a sharp upward swing in interest rates, cooling certain markets, namely the automotive and housing markets. 

How will the taper impact you? 

At the individual level, there are several ways this tapering may impact you. 

First, the good. Inflation should subside, and costs for day-to-day needs, like food and household supplies, should fall too. This’ll be a welcome sight to many Americans. You also may see interest yields rise on high-yield savings accounts (HYSAs), certificates of deposit (CDs) and other interest-bearing accounts. 

On the downside, we’ll likely see interest rise on consumer debt. So, if you have a variable-interest credit card or loan, you could see a rate increase soon. Also, folks in the market for a new home or car may have to trim their budgets to account for higher interest rates when they’re ready to buy. 

This could also lead to a sudden uptick in purchasing these large items, putting a stranglehold on already limited inventory in the housing and automotive spaces. 

Though we won’t know the impacts for certain until the Fed officially begins tapering, the institution's choice to begin the process does signal its confidence in a rebounding economy.