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News Flash - The Great Unwinding Has Arrived

In a landmark moment for the US’ recovery from the Covid-19 economic crisis, the Federal Reserve said that it would begin reducing its asset purchases by $15 billion/month beginning later in November.

When that program fully runs out next summer, investors expect the Fed to begin hiking interest rates, which are currently near zero. No rate hikes were announced yesterday.

How we got here

In spring 2020, the Fed unleashed the stimmy to end all stimmies: a $120 billion/month bond-buying program designed to keep borrowing costs low and help consumers and businesses weather the economic storm. This program, and other relief measures introduced by the government, are credited with keeping the economy afloat and spurring a faster-than-expected economic recovery.

But as the economy regained its footing, another menace has emerged: inflation. A medley of factors, including supply chain bottlenecks and roaring consumer demand for goods, has driven prices higher than the Fed, or really anyone going shopping, would like.

  • In September, consumer prices grew by 4.4% annually, compared to the Fed’s 2% target.
  • US gas prices averaged $3.40/gallon as of last Saturday, up from $2.14 a year ago.

Concerned that higher inflation could become its own drag on the economy, central bankers decided it’s time to wind down the stimulus and hope that prices come back down to Earth.

Zoom out: The Great Unwinding isn’t a US solo album. Central bankers from Australia to Canada have already begun to roll back their pandemic-era stimulus measures as the global economy heals and inflation becomes a threat. Today, the Bank of England could become the first major central bank to raise interest rates following the recession.—NF - Giphy via Morning Brew


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Jonathan Caguioa

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