If you’ve been watching financial news in recent months, you may have heard of the Federal Reserve, especially in regards to the “cone.” In this fool live Video clip, recorded on December 16, Fool.com contributors Matt Frankel and Jason Hall, break down taper in layman’s terms and explain why it’s important for investors to know about it.
Matt Frankel: Basically the Fed is trying to control inflation, which they call transient, which is say a bad call. Inflation doesn’t appear to be as temporary as the Fed thought it would be. The Fed has a few tools at its disposal, and interest rates are what everyone is familiar with. But if the Fed raises rates, the idea is that consumer spending will decrease, borrowing money will cost more, and consumer savings will increase.
Mark just mentioned CDs, so interest rates and that sort of thing are going to go up, and that makes saving more attractive. The combination of lower consumer spending and increased savings is expected to slow the economy.
The Fed has another tool at its disposal, which it calls quantitative easing, which is a fancy way of saying printing money. What the Fed does is buy bonds. Until November, they were buying $ 120 billion a month on the open market, a combination of treasury bills and mortgages, which is one of the main reasons mortgages have remained at record levels then. even as the economy recovers from the COVID pandemic because the Fed is buying mortgages left and right.
The idea of printing money is that if you just throw billions of dollars which is basically newly created money into the system, it will stimulate the economy. Typing it is the Fed’s word to gradually reduce these bond purchases which should start to tighten the economy a bit.
Jason Hall: They say tapering, I guess, because weaning isn’t as visually pleasing as they would like. But that’s basically what it is; it is to wean the economy from this liquidity at very low prices and easily accessible.
Frankel: This is really what they are getting into. An important implication is that you could see mortgage rates go up. Things like credit card interest rates are not directly correlated.