A simplified explanation of the latest developments in Federal Reserve policy
On Wednesday, the Federal Reserve decided not to change interest rates, continuing the same policy it has followed since July 2023. However, a big change is on the horizon.
Starting in June, the Federal Reserve plans to reduce its quantitative tightening (QT) program. This program includes selling assets to reduce the money supply with the possibility of raising interest rates, with the aim of controlling economic inflation.
This adjustment resulted in US Treasury yields falling by 0.05 percentage points for 10-year and 2-year bonds, which affects matters such as mortgage and loan interest rates.
Here are the most important points about that:
Illustrative Context: From 2020 through 2022, the Federal Reserve purchased a large amount of government bonds to lower interest rates and aid the post-pandemic economic recovery.
Change of strategy: As inflation rose in mid-2022, the Fed began selling these bonds, currently allowing $60 billion worth of bonds per month to expire without renewal, withdrawing money from the economy.
