The Fed didn’t just make America’s rich richer during the pandemic. The world’s wealthy class got a boost.

Jerome Powell reads document while speaking in front of the Senate.
Fed Chair Jerome Powell testifies about the CARES Act report on December 1, 2020.

  • It wasn’t just rich Americans that profited from Fed-fueled market rallies. The global elite benefitted, too.
  • Rate cuts sparked a buying spree in the housing market and led investors to bid stocks higher.
  • As the Fed goes, so goes the world’s economy, and the fortunes of the global elite.
  • See more stories on Insider’s business page.

The Federal Reserve saved the economy during the pandemic, and, in doing so, made America’s wealthy class wealthier.

But they aren’t alone. The entire global elite benefited from the actions America’s central bank took to prevent economic catastrophe.

The global rebound from virus-fueled recession has featured extraordinary rallies across asset classes. Global stocks surged 33% above pre-pandemic levels and home prices rocketed higher all across the globe.

Both trends were largely powered by the Fed. The central bank pulled interest rates close to zero and started buying Treasurys and mortgage-backed securities in March 2020 to bolster financial markets and encourage spending.

The emergency actions indirectly boosted major markets. Expectations for years of easy monetary conditions led investors to furiously bid stocks higher. The rate cuts also kicked off a homebuying frenzy as people rushed to lock in rock-bottom mortgage rates.

The Fed led the way, and similar outlooks from other central banks saw such activity spread around the world. Global home prices rose at the fastest pace in four decades and show “little sign of stopping,” JPMorgan economists led by Joseph Lupton said Monday. Intense home-price growth emerged in the US, Turkey, Russia, Korea, Australia, New Zealand, Brazil, and Czechia, they added.

The global stock and housing rallies padded the pockets of those best prepared to weather the pandemic. The world’s wealthy class has the most exposure to both markets. And unlike the late 2000s, the global elite is benefitting from two market surges at once.

JPM
Chart via JPMorgan

Not quite déjà vu

The Great Recession saw home prices nosedive as the US housing bubble popped. JPMorgan’s home-price index nearly halved through the crisis before recovering over several years.

Things are different this time.

Instead of plummeting like in 2008, home prices in developed economies bounced to fresh highs throughout the pandemic. And while global stock prices have retraced some of their recent gains, they still sit well above their pre-COVID highs. Central bank policy, then, is serving to prop up the global wealthy class more than in the late 2000s.

That surge brings new risks to central banks already in crisis mode, JPMorgan said. For one, leaping home prices could lift housing-service prices and drive inflation to uncomfortable highs.

Periods of outstanding home-price appreciation are also associated with greater borrowing and heightened risk. That could raise fears of another market bubble just as central banks are looking to pare back their aid, the bank said.

“With the Global Financial Crisis still fresh in central bank thinking, the ongoing surge in house prices with little sign of abating adds to the risk of an earlier removal of monetary policy supports,” the team added.

And while the Fed hasn’t yet changed its policy stance, some officials have raised concerns around how easy money is affecting the housing market.

The Fed’s purchases of mortgage-backed securities could be having “some unintended consequences and side effects,” Robert Kaplan, president of the Federal Reserve Bank of Dallas, said in May.

St. Louis Fed President James Bullard was even clearer in his worry.

“Maybe we don’t need to be in mortgage-backed securities with a booming housing market,” Bullard said on CNBC in June. “We don’t want to get back in the housing bubble game that caused us a lot of distress in the 2000s.”

Finally, there was one striking example of the wealthy possibly benefitting from monetary policy decisions made by the central bank: stock trades by Fed officials themselves.

Kaplan and Boston Fed President Eric Rosengren announced last week they would sell all of their individual stock holdings by September 30 after disclosures of their trading during the pandemic prompted ethics concerns. Kaplan caught flak for several trades worth at least $1 million, while Rosengren held stakes in four real estate investment trusts. Nonetheless, the trades happened amid a stock boom the Fed helped create.

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Bank of America projects the Fed will taper asset purchases in November, ahead of earlier projections of 2022

Jerome Powell
  • The Federal Reserve is likely to start reducing asset purchases in November, said Bank of America on Thursday.
  • BofA sees the Fed cutting down US bond buys by $10 billion to $70 billion in November.
  • The Fed’s decision on tapering will be highly dependent on economic data with COVID-19 infections on the rise.
  • See more stories on Insider’s business page.

The Federal Reserve is likely to begin reducing its purchases of Treasury bonds and mortgage-backed securities in November, Bank of America said Thursday, changing its outlook on the end of stimulus efforts spurred by the coronavirus pandemic.

The investment bank shifted its view to November from January 2022 following the release of minutes from the Fed’s July meeting on Wednesday. The minutes suggested most members of the Federal Open Market Committee see the central bank on course this year to start reducing the emergency asset purchases put in place to help the world’s largest economy weather the COVID crisis.

“September seems too early to start a taper since the minutes signaled FOMC agreement on providing ‘advance notice’ before making changes to balance sheet policy and may be too early to get a proper read on employment data since delta variant concerns emerged,” said BofA in a note led by rates strategist Mark Cabana.

December seems unlikely considering the timing of when the Fed should announce its schedule of monthly purchases of US Treasuries and mortgage-backed securities.

“If the Fed indeed wants to start reducing purchases this year, November then seems the most likely timing,” said BofA.

The central bank has been buying $80 billion worth of Treasury securities and $40 billion in mortgage-backed securities, or MBS, every month since June 2020 to help the world’s largest economy recover from the coronavirus crisis that pushed it into a deep but short recession.

The Fed will likely reduce Treasury bonds buys to $70 billion in November and to $60 billion in January 2022 followed by gradual decreases until purchases hit zero in September 2022, the bank said.

MBS purchases are likely to go down to $35 billion in November and to $30 billion in January 2022 before also gradually stepping down to zero in September of next year.

But any decision on tapering will be highly conditional on the flow of economic figures, said the rates strategists and economists.

“With the recent rise in COVID cases, the Fed will be monitoring the incoming data closely to make sure that the economy continues to make ‘substantial further progress’ towards its dual mandate (especially on employment) before announcing any changes to its asset purchase program.”

That means even more scrutiny on upcoming US nonfarm payrolls reports. The bank sees a risk of a disappointing jobs report for August in part because of concerning signs among small businesses and potential weakening in the service sector because of the highly transmissible Delta variant of coronavirus. The US jobs report is due in early September.

BofA said the Fed completing asset tapering by the end of the third quarter would give the central bank flexibility to raise interest rates by end of 2022 if they see that as an appropriate move. Policy makers last year cut interest rates to a target of 0% to 0.25% to reduce borrowing costs.

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The Fed hints it’ll start reining in pandemic-era stimulus later this year

Federal Reserve
  • Minutes from the Federal Reserve’s July meeting reveal when it could start removing policy support.
  • Most participants saw reason to start shrinking the Fed’s emergency asset purchases later this year.
  • Still, members disagreed on the speed, schedule, and composition of tapering purchases.
  • See more stories on Insider’s business page.

There’s an end in sight for the Federal Reserve’s drastic economic support.

A majority of the central bank’s policymakers determined late last month the Fed could start reducing the amount of money it’s feeding into the economy as early as this year, minutes from the Federal Open Market Committee’s July meeting showed Wednesday.

“Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes said.

The statement is the first to reveal any kind of timeline for the Fed’s tapering of the asset purchases that began at the start of the pandemic. Paired with near-zero interest rates, these measures were meant to promote borrowing and support financial markets.

Still, the minutes show just the first step toward adjustment.” The Fed isn’t any closer to formally announcing the reduction of their extraordinary support,” Ed Moya, senior market analyst at OANDA, said in a note, adding an announcement is most likely to land after the November FOMC meeting.

The shift in outlook was tied to progress toward the Fed’s two recovery goals. Fed Chair Jerome Powell had long said supportive policy would remain in place until “substantial further progress” was made toward above-2% inflation and maximum employment.

Attendees at the July meeting determined that criterion was “satisfied” for the Fed’s inflation goal, and “as close to being satisfied” for its employment target, according to the minutes. Because of that progress, several FOMC members noted that strong economic conditions warranted tapering its Treasury and mortgage-backed security purchases “in coming months.”

Fed still split on the details

The taper timeline didn’t receive unanimous backing. Several participants said a reduction in asset purchases should come early next year instead, noting the labor market hadn’t healed enough to warrant a pullback. Others felt that tapering shouldn’t happen “for some time” due to rising COVID cases and their effect on hiring.

And details around the Fed’s eventual tapering are scant. FOMC members laid out a “range of views” on how quickly they should shrink purchases. Some preferred completely ending asset purchases before the Fed lifted interest rates, while others argued reasons for tapering were different than reasons for raising rates.

Disagreements also emerged over which purchases should be tapered first. Most participants said shrinking the Fed’s buying of Treasurys and mortgage-backed securities proportionally was most effective. However, some said reducing MBS purchases more quickly made sense due to surging home prices. A handful of regional Fed presidents have raised concerns about the red-hot housing market in recent months and mulled a faster withdrawal of MBS purchases.

The FOMC next meets on September 21 and 22, meaning any policy change is still more than a month away. Powell will speak at the central bank’s annual symposium in Jackson Hole, Wyoming, which is scheduled to take place from August 26 to 28.

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Mohamed El-Erian says the stock market won’t react to tapering speculation until the Fed’s ‘Big 3’ starts to take it more seriously

Federal Reserve Vice Chairman Richard Clarida, Federal Reserve Chairman Jerome Powell, and John Williams, Federal Reserve Bank of New York CEO John Williams (L-R)
Federal Reserve Vice Chairman Richard Clarida, Federal Reserve Chairman Jerome Powell, and John Williams, Federal Reserve Bank of New York CEO John Williams (L-R)

  • Economist Mohamed El-Erian said the market has not reacted to tapering speculation because the Federal Reserve’s “Big Three” hasn’t directly discussed it.
  • El-Erian was referring to Fed Chair Jerome Powell, Fed Vice Chair Richard Clarida, and Fed New York CEO John Williams.
  • “The market is still conditioned by the notion that the Fed … will not taper,” he told CNBC.
  • See more stories on Insider’s business page.

Despite speculation that the Federal Reserve may tighten its monetary policies sooner than expected amid a robust economic rebound in the past months, the market has not reacted simply because the “Big Three” hasn’t spoken, according to Mohamed El-Erian on Monday.

“This migration to ‘let’s get going’ is from below,” El-Erian told CNBC Monday, referring to various Fed officials who have weighed in on the central bank’s asset purchases. “So as long as the ‘Big Three’ aren’t saying it, the market is not going to be listening to anything else.”

El-Erian was referring to Fed Chair Jerome Powell, Fed Vice Chair Richard Clarida, and Fed New York CEO John Williams.

“The market is still conditioned by the notion that the Fed … will not taper,” he told CNBC. “Why? Because it has been so influenced by what happened in 2013 the taper tantrum, from what happened in the fourth quarter of 2018 when the Fed was forced into a very embarrassing U-turn.”

The 2013 taper tantrum was when collective panic prompted US Treasury yields to spike while the 2018 reversal was when the Fed signaled several rate hikes for that year then slashed them to none.

The Allianz and Gramercy advisor has for months been reiterating that he thinks the Fed should have tapered already given the inflationary setup.

Still, El-Erian thinks little to no direction will be offered during the high-profile annual Jackson Hole conference of central bankers from August 26 to 28. As for the Federal Open Market Committee meeting on September 22, he is a bit more hopeful.

“I think it’s really important for the chair to regain control of the narrative, otherwise he’s going to have a very split FOMC,” he said.

El-Erian, who is also the president of Queens’ College, Cambridge University, did add that once the Fed does taper assets, he thinks the market will not collapse.

“You will get some pullback, and you should, because we are at bubblish levels in certain places because of this massive liquidity, but I don’t think this is a collapsed situation,” he told CNBC. “This is a ‘let’s get more sober’ situation.”

El-Erian then discussed the two biggest risks he sees in the market right now: a big policy mistake for “not doing anything” or a market accident due to excess liquidity.

“If you look at really what the big risk to the economies are it is if they do not taper because then you increase tremendously … the high likelihood of this policy mistake or market accident,” he said.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

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Mohamed El-Erian says the Fed should be tapering already amid inflationary signals – and recommends buying tech stocks in a rising-price environment

Mohamed El-Erian, Chief Economic Adviser of Allianz appears on a segment of "Mornings With Maria" with Maria Bartiromo on the FOX Business Network at FOX Studios on April 29, 2016 in New York City.
  • The Federal Reserve should already be tapering asset purchases amid inflationary signals, Mohamed El-Erian said Monday.
  • “The Fed is late,” he told CNBC. “They are going to be very dovish for very long. They’ve already proven it.”
  • The famed economist also said he prefers to be in the technology sector given the rising-price environment.
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The Federal Reserve should already be tapering assets purchases amid inflationary signals, Mohamed El-Erian said on Monday ahead of the figures for July CPI due this week. The famed economist also said he prefers to own tech stocks in such a rising-price environment.

“The Fed is late. It should have started tapering already,” El-Erian told CNBC on Monday. “I think the market continues to believe that the Fed will hold out from tapering as long as possible and, therefore, will not raise rates for a while. They are going to be very dovish for very long. They’ve already proven it.”

Given this inflationary setup, the chief economic adviser at Allianz laid out two reasons why he favors tech stocks.

First, he noted that tech companies have proven especially adept at navigating changes in a COVID-impacted environment. Some such examples are Facebook, Apple, and Microsoft, which saw explosive growth during the height of the pandemic.

Secondly, he said these very same firms are less impacted by inflation, and can keep revenues afloat better than any other industry.

“So, they have a revenue advantage and they have a cost advantage, and therefore they have a very strong earnings advantage,” he said.

El-Erian also touched on July’s stellar jobs report, which saw the US economy adding 943,000 payrolls in that month.

“The wage numbers on Friday’s report were really good for the US economy” but were “less good for input costs,” El-Erian told CNBC. “If the inflation proves to be tamed, then you’ve got the Goldilocks.”

A Goldilocks economy, he explained, comes from the combination of both approaches.

“Top-down has been continued ample, predictable liquidity,” he told CNBC. “Bottom-up has been strong earnings, and that has powered the markets through all sorts of things.”

El-Erian did say inflation will eventually “exhaust itself” though on a “much longer timeframe than what the Fed expects right now.”

He’s repeatedly pointed to people’s lack of understanding of how it is already spreading throughout the economy and has countered the Fed’s longstanding narrative that inflationary pressures are temporary.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

Read more: Credit Suisse says buy these 21 growth stocks now as it’s the perfect time for them to thrive while rates fall – and to minimize the risk of losses

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The Fed knows skyrocketing home prices are a problem, but doesn’t know what to do about it

Condo for sale sign
  • Federal Reserve policymakers have an eye on surging US home prices, meeting minutes showed.
  • Some officials “saw benefits” to tapering mortgage-loan purchases to cool the red-hot market.
  • While members chose to hold policy steady, the minutes signal the Fed may want to curb home-price inflation.
  • See more stories on Insider’s business page.

Of the various items surging in price through 2021, homes are possibly the most extraordinary.

Price growth is the strongest it’s been in more than 30 years. While demand remains elevated, builders have struggled to bring more supply to market. America’s central bank played at least some role in this incredible price inflation.

The Fed’s emergency policies dragged mortgage rates to record lows and helped spark the sharp increase in homebuying. But as prices climb to dizzying heights, some experts have called on the Fed to rein in its support. Officials at the Fed are tuned in to the problem, minutes from the Federal Open Market Committee’s June meeting showed.

Several of the meeting’s participants “saw benefits to reducing the pace” of the central bank’s purchases of mortgage-backed securities, citing “valuation pressures in housing markets.” They also suggested tapering MBS purchases earlier than Treasury purchases, a move that would counter the Fed’s past signals.

The FOMC meeting ended with policymakers electing to hold rates near zero and keep buying at least $80 billion in Treasurys and $40 billion in MBS each month.

The outlook echoes comments made in recent months by a handful of Fed officials. Dallas Fed President Robert Kaplan said in May that MBS purchases could be having “some unintended consequences” that should be weighed against their benefits.

“We don’t want to get back to the housing bubble game that cost us a lot of distress in the 2000s,” St. Louis Fed President James Bullard said on CNBC in mid-June.

Other FOMC members, however, saw reason to stay the course. Several said synchronized tapering of Treasurys and MBS purchases would be preferable, since that “would be well aligned with the Committee’s previous communications,” the minutes showed. They also noted purchases of both Treasurys and MBS helped the Fed achieve its goal of easing financial conditions.

For the moment, any policy shifts are likely months away. FOMC participants agreed to continue assessing the housing market and discussing plans for eventual tapering. Fed Chair Jerome Powell has repeatedly said that “substantial further progress” toward the Fed’s goals of maximum employment and inflation averaging 2% was required for policy adjustments.

Officials generally agreed in June the threshold hasn’t yet been met, according to the minutes. For now, then, the Fed is set to keep house prices booming. But there’s a crack in their thinking.

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Monetary stimulus will remain in place well into economic recovery, Fed Chair Powell says

jerome powell fed mask
  • Federal Reserve Chairman Jerome Powell reiterated Thursday that the central bank is far from tapering its asset purchases or raising interest rates.
  • “Now is not the time to be talking about an exit” from easy monetary policy, the central bank chief said in a virtual discussion.
  • The comments come after various Fed officials suggested that inflation could pick up faster than expected and, in turn, prompt an early rate hike.
  • Powell rebuffed fears of an unexpected policy shift, noting the central bank will notify the public “well in advance” if it is considering changes to its policy stance.
  • Visit Business Insider’s homepage for more stories.

Those worrying the Federal Reserve will prematurely rein in monetary stimulus have little to fear, Fed Chairman Jerome Powell said Thursday.

As COVID-19 vaccines roll out across the country, investors and economists have looked to Fed officials for any hints as to when its extremely accommodative policy stance could reach its conclusion. The central bank is currently buying $120 billion worth of Treasurys and mortgage-backed securities each month to ease market functioning, and its benchmark interest rate remains near zero to encourage borrowing.

An unexpected reversal from such easy monetary conditions risks spooking financial markets and cutting into the country’s bounce-back. Powell emphasized on Thursday that the central bank remains far from adjusting monetary conditions and that markets need not worry about a surprise policy shift.

“Now is not the time to be talking about an exit,” the central bank chief said in a virtual discussion hosted by Princeton University. “I think that is another lesson of the global financial crisis, is be careful not to exit too early. And by the way, try not to talk about exit all the time if you’re not sending that signal.”

Read more: ‘Vastly technically disconnected’: A market strategist breaks down the 3 indicators that show Tesla is overpriced – and says it’s due for a 17% correction in the next 6 weeks

The messaging mirrors past statements from Fed policymakers. Early in the pandemic, Powell told reporters the central bank wasn’t “thinking about thinking about” lifting interest rates. The Federal Open Market Committee noted last month that changes to its policy stance won’t arrive until “substantial forward progress” toward its inflation and employment objectives is made.

Still, recent commentary from some officials has stoked some fears that the Fed could cut down on the pace of its asset purchases sooner than expected. Kansas City Fed President Esther George said Tuesday that inflation could reach the Fed’s target “more quickly than some might expect” if the economy’s hardest hit sectors quickly recover.

A swifter-than-expected rebound could prompt an interest-rate hike as early as mid-2022 Atlanta Fed President Raphael Bostic said Monday. The projection stands in contrast with the FOMC’s general expectation for rates to remain near zero through 2023.

Powell reassured that, when the Fed starts considering a more hawkish stance, messaging will come well before action is taken. Treasury yields responded in kind, with the 10-year yield climbing nearly 4 basis points to 1.127 and the 30-year yield rising about 6 basis points to 1.874.

“We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases,” the Fed chair said.

Read more: Morgan Stanley says to buy these 26 economically sensitive stocks poised to outperform as oil prices spike 10% by year-end

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