The Fed May Scale Back Stimulus

If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase. So, OMO has the same effect of lowering rates when increasing the money supply, or raising rates when decreasing the money supply, which is a direct manipulation of interest rates.

While the Fed has been flooding the market with liquidity throughout the pandemic, the rise of the Covid Delta variant has complicated the economic outlook by creating renewed risk of a sharper economic slowdown at the very moment some officials were ready to reduce, or taper, the pace of monthly bond purchases. Growth in consumer spending slowed in July to 0.3 percent, less than a third of June’s spending increase of 1.1 percent and less than economists had projected. Spending on services grew, while spending on goods declined. And of course inflation is growing strongly, although Fed Chairman Jerome Powell is convinced that it will fall back when the economy settles down to normal, a view we share.

The Fed has a tricky balancing act and has done a great job of managing the economic impact of the pandemic. Based on recently reported metrics, it is having a positive impact on the concrete industry.