America has become a huge housing site

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The US economy has a extraordinary comeback from the lows in early 2020. And while there’s still some room for improvement, the economy has made enough progress that the Federal Reserve feels comfortable rolling back some of its emergency monetary policy measures.

This means you’re about to see a lot of mind-numbing headlines about the Fed and monetary policy and the “phasing out” of quantitative easing (QE).

This is incredibly important stuff, but it’s easy to get lost in the jargon and/or nitpicking that often emanates from the Fed’s many vocal critics.

it comes down to is that we are only talking about this because the economy has indeed undergone an incredible recovery over the past year and a half. And now Fed doctors are starting to remove the monetary fan so the economy can start breathing on its own.

‘Quantitative Easing’ Primer

On Wednesday, Fed Chair Jerome “Jay” Powell to be expected to announce that the central bank will phase out QE.

More formally known as large-scale asset purchases, QE involves the Fed buying billions of dollars’ worth of bonds to keep bond markets liquid and interest rates relatively low. In other words, it is an effort to make it easy for consumers and businesses to borrow money and do so cheaply.

When the economy and markets fell apart in March 2020, the Fed launched QE. The plan initially included the purchase of government bonds and mortgage-backed the required quantitiesThis was one of many policy actions that the economy find a bottom and bend upwards.

In June 2020, the Fed adjusted QE to $80 billion a month for Treasury bill purchases and $40 billion a month for mortgage-backed securities. This is where we’ve been since then, and it’s what the Fed is expected to start calling back this month.

Many struggling companies benefited from low financing rates. Many home buyers have benefited of low mortgage rates. Many homeowners also used refinance their mortgages at lower rates.

Federal Reserve Chairman Jerome Powell leaves a meeting in the office of Senator Chris Van Hollen, D-Md., in Hart Building on Wednesday, Oct. 6, 2021. (Photo by Tom Williams/CQ-Roll Call, Inc via Getty Images)

The ‘substantial further progress’ of the economy

As part of its mandate, the Fed has been in charge for a long time by using its capabilities to promote price stability and maximum employment levels.

How all this is defined is rather vague. Inflation is expected to average 2% over time while maximum employment is also expected to be “wide and inclusive.(It is thought that loose monetary policy stimulates inflation, so that it don’t get too low.)

Last December, the Fed said it would continue QE until the economy makes “substantial further progress” toward those goals. Again, vaguer language. But recently, the Fed has suggested that the economy has made this progress.

After more than ten years showing a trend below 2%, Fed’s preferred measure of inflation went above 3% last April and has been hovering at 3.6% since June.

(Source: FRED/TKer)

(Source: FRED/TKer)

Like many economists, the Fed has attributed much of the recent rebound in inflation to non-permanent factors such as the ongoing supply chain disruptions. Nevertheless, Fed Chair Jerome Powell acknowledged that “the ‘substantial further progress’ test has been passed for inflation.”

And while total employment is still about 5 million jobs below its February 2020 pre-pandemic level, it’s 17 million more than at the pandemic’s trough in April 2020, and the economy continues to add hundreds of thousands of jobs each month. In other words, it becomes difficult to argue that employment has not made substantial progress.

(Source: FRED/TKer)

(Source: FRED/TKer)

What happens now

This is not the end of the Fed’s support. It’s not even the end of QE. It’s the tapering off of QE, which means the Fed will still buy bonds, but buy fewer bonds. So there will be some form of Fed support for many months to come.

As the Fed gradually slows down bond purchases — all other things equal — we should see long-term interest rates like mortgage interest rate rises.

In fact, mortgage rates have already risen a bit, perhaps in anticipation of the Fed winding down. This can help lower house prices, which are at record highs.

In general, higher borrowing costs could cause the economy to cool further, which should help push inflation back to that 2% target.

And all that said…

Monetary policy is incredibly complex and nuanced. Everything I mentioned above comes with a lot of “Yes, but…” questions. There is also always the risk that the Fed is making or has made a ‘policy mistake’.

For the purposes of this conversation, know this: The economy was in trouble. The Fed stepped in and helped the economy turn around. The economy has been recovering for months. And now the economy is in such good shape that the Fed will soon begin to roll back its emergency monetary measures.

Everything else is details.

More from TKer:

Back view

📈 Stocks set record highs! The S&P 500 gained 1.3% last week and 6.9% in October, closing at a record high of 4,605 ​​on Friday. 👀 We are also entering a historic sweet spot for the markets: LPL Financial’s Ryan Detrick notes which has been the best month of the year for equities on average since November 1950. Jeff Hirsch, editor of the Stock Trader’s Almanac, notes that November to January was historically the best three-month period for equities. 👯‍♀️ So we are clear, past performance is no guarantee of future results. But again, Mark Twain once said, “History doesn’t repeat itself, it often rhymes.”

🤕 Amazon’s Precious Headache: People use Amazon because Amazon gets you everything cheap and fast. To keep that promise amid the supply chain nightmare, Amazon spends a fortune ensure they can deliver. In fact, while they expects to sell $130 billion to $140 billion value of goods during the holiday quarter, management warns that any such business could yield a $0 operating profit. Literally $0.

📱 Apple’s Delivery Problems: Even a company as well equipped and well connected as Apple is not impenetrable for supply chain problems, which CNBC Reports cost the company $6 billion in revenue during the third quarter.

Wage increases: Starbucks plans to raise minimum wage to $15 an hour, from $12 next year. Costco says it is raising the minimum wage to $17 an hour on Monday, up $16. These kinds of headlines are no fluke. New data from the Bureau of Labor Statistics showed: wage growth reached record high in Q3 – led by profit for the lowest paid workers! 🍾🍾 If you want to know why wages are going up these days, read about me and the 4.3 million quitters.

🍔 Inflation control: McDonald’s has raised prices to offset higher raw material and labor costs. management said: menu prices are 6% higher now compared to a year ago, indicating that inflation is very real.

🤔 deflation control: Sure, the prices of many things are going up. But here’s a thought from Microsoft CEO Satya Nadella: “Digital technology is a deflationary force in an inflationary economy. Companies – small and large – can improve the productivity and affordability of their products and services by building technology intensity.”

I can confirm: the $1,100 MacBook Air I recently bought is much better and literally cheaper than the $2,400 Dell Inspiron my parents bought me for college in 2000.

Inflation? NBD for Americans: According to the findings of a new Gallup poll, American confidence in the economy has deteriorated. The most cited issues were led by ‘Government/poor leadership’, ‘COVID-19’ and ‘Immigration’. “High cost of living/inflation” was relatively low, ranking seventh on the list.

Meanwhile, “a record high of 74% says now is a great time to find a quality job”. Conference Board Survey, which found that the percentage of consumers who said “jobs are plentiful” minus those who said “jobs are hard to get” highest in 21 years.

Electric vehicles everywhere: Hertz, the car rental company, has announced it will order 100,000 Teslas in its pursuit of building an electric vehicle fleet. Meanwhile, GM CEO Mary Barra repeated that she expects her company to grow its EV business from $10 billion in annual sales in 2023 to $90 billion in 2030.

🙈 face off: Facebook is change the name to Meta, and it changes its ticker to $MVRS from $FB as of December 1. Also the Washington Post reported that Facebook prioritizes content that makes you angry in your news feed.

on the road

The big event in the markets and the economy next week is the Fed’s monetary policy announcement coming Wednesday afternoon.

The October jobs report in the US will be released Friday. Economists estimate that employers added 425,000 jobs during the month, bringing the unemployment rate down to an estimated 4.7%, from 4.8% in September.

There are also some large companies that will release their quarterly results next week.

¹ In markets, liquidity can mean many different things. One way to think about it is that if markets are liquid, there is a healthy balance between buyers and sellers. When there are very few buyers, prices tend to fall. If there are very few sellers, prices often go up. By acting as an aggressive buyer in the bond markets, the Fed not only kept bond prices in check, but probably also kept bond prices relatively high. (In bond markets, falling prices mean interest rates are rising. And so when the Fed bought mortgage-backed bonds, it helped keep mortgage rates low.)

² When the economy deteriorates, banks will generally limit lending and borrowing rates rise. QE is meant to counter that.

³ “In the required amounts” basically means that they set no limits. Because things were totally unprecedented in the world in a bad way.

Sam Ro is the author of Follow him on Twitter @SamRo.

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