The federal reserve has been a strong pillar of support for the stock market since the onset of the pandemic in 2020. It has lowered long term interest rates and kept liquidity loose.
Currently, the asset purchase programme includes $80 billion in treasury securities and $40 billion in Mortgage-Backed Securities. The Fed’s balance sheet has more than doubled from last year. The economy is underway to expand at a fast rate and continued support may do more harm than good.
So when is the Fed going to start the taper? Immediately. It has been announced that from mid-November the Fed will reduce Treasury purchases by $10 billion and MBS purchases by $5 billion. The expectation is to continue this pace and by Q3 next year, the QE cycle will be over.
The gradual nature of stopping asset purchases is to avoid spooking the financial markets. The Fed has also said that it is flexible to increase or decrease the pace of the taper depending on requirements. The stock market has taken this announcement in a positive way.
For the last month, the S&P 500 is up 10% and the Nasdaq 11%. The US 10 year currently yields 1.48%.