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The Fed will start stripping billions in support next month

by Peter A. McKay
Sep 20 2017, 12:01am

The financial crisis flared up a decade ago, and on Wednesday, we got a reminder that the Federal Reserve still hasn’t gotten back to normal.

Following a two-day meeting, the central bank’s policy committee announced fresh plans to try to withdraw some of $4.5 trillion in support it extended in an effort to stabilize the economy during and after the financial crisis and Great Recession.

The announcement caused a wobble in the stock market, which is understandable. The Fed —a quasi-independent arm of the U.S. Federal government that regulates the supply of money in the U.S. economy— plays a crucial, though often misunderstood role in the U.S. economy. Among other things, the Fed raises and lowers the availability and cost of borrowing for everything from mortgages to corporate projects to student loans.

And since the financial crisis, the Fed tried to make money much cheaper, by keeping interest rates low and creating some $4.5 trillion in new money that it tried to push into the economy. So-called “easy money” policies from the Fed have helped drive a surging stock market over the last seven years. And Fed’s decision to start to reduce the amount of its support for the economy—effectively shrinking the money supply—would be a big change in what has been a helpful backdrop for investors for almost a decade.

Other details to watch:

  • The Fed isn’t the only global central bank likely to reduce its monetary stimulus this year. (The Bank of England and the European Central Bank also seem likely to tighten the money supply.) If central banks are less willing to print money to help cushion economies from economic problems, that means governments will have to pick up the slack by spending more to bolster economic growth, the Organization for Economic Cooperation and Development said in its quarterly global outlook released Wednesday.
  • Federal Reserve Chair Janet Yellen, whose term ends in January, may only have two policy meetings left. The policy committee’s schedule isn’t set beyond December, and it’s unclear whether President Trump will reappoint Yellen, who is a Democrat.
  • Wednesday’s announcement came nearly nine years to the day after the meltdown of Lehman Brothers, widely viewed as the trigger event of the financial crisis. Lehman filed for bankruptcy on Sept. 15, 2008.

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