Eighteen months after the start of the Covid-19 pandemic, the Federal Reserve (Fed) decided to ease its support for the US economy. For months, the institution chaired by Jerome Powell has been caught between inflationary pressures and the disappointing recovery in employment, hampered by the Delta variant and bottlenecks in the economy.
The central bank will not start by raising its interest rates, but by reducing its purchases of US Treasuries, which currently reach 120 billion dollars (103 billion euros) per month. This measure, inaugurated after the great financial crisis of 2008, was resumed in March 2020, when the Covid-19 crisis erupted. It has made it possible to ensure liquidity in the markets and to reduce the long-term interest rates demanded by investors.
At the start of the crisis, the Fed even extended its program of purchases to the debt of private companies. This exceptional provision, interrupted at the end of 2020, had made it possible, for example, to save the cruise line Carnival, which was able to refinance itself, while its liners were empty, docked or sailing off Miami.
These measures have resulted in an artificially low maintenance of long-term interest rates, which are normally determined by the markets (the Fed only sets rates in the short term) and in almost direct financing of US fiscal deficits. By dint of buying everything, the Fed’s balance sheet has doubled since March 2020, reaching the astronomical level of $ 8.5 trillion at the end of October, including 4.5 trillion in treasury bills and 2.5 trillion in public mortgages. For comparison, the total US government debt market is $ 21.9 trillion, the equivalent of one year of gross domestic product (GDP).
Purchases of securities (Treasury bills and public mortgages) will be reduced to 105 billion dollars in November, to 90 billion in December, and should fall to zero in June 2022. The bank specifies that it will adjust according to the economic circumstances. At the time of the Fed’s announcement, the US Treasury announced a $ 84 billion decline in its funding requirements for the next three months, not least because the various Biden plans are not passed and the exceptional measures to counter the effects of Covid-19 are coming to an end. This announcement balances the market, deprived of Fed purchases. When the Fed released its press release on Wednesday, November 3, the yield on 10-year rates rose 1.55% to 1.6%.
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In the United States, the Federal Reserve begins to reduce its support for the economy