monetary policy: as the Fed tightens its monetary policy, the US government debt market is heating up
Why does the Federal Reserve (the Fed) change monetary policy?
- The Fed has exclusive jurisdiction to change money supply and credit conditions, giving it the power to control monetary policy.
- The Fed gives direction to the economy by changing interest rates in the market, which in turn affects interest-rate-sensitive spending as well as capital transactions between countries.
- In the short term, a change in monetary policy can be used to boost or slow overall spending.
- Also, monetary policy affects long-term inflation. Lower inflation rates promote transparency, which leads to a healthier economy.
What has been the Fed’s monetary policy during the pandemic?
- Price movements in the Treasury market are reflected in all other markets, which leads to a chain effect throughout the economy.
- With the onset of the pandemic in March 2020, global market turmoil worsened with sharp price declines due to risk aversion in the US Treasury market.
- The Fed stepped in by pledging to buy unlimited amounts of government bonds and taking steps to stimulate the corporate debt market to stabilize falling markets.
On top of that, the war in Ukraine has resulted in many bouts of volatility on Treasuries in recent days. Such severe volatility is very rare. It has given rise to many concerns in the $23 billion market. According to traders, this is the deepest in global finance.
According to Mark Cabana, head of US rates strategy at Bank of America, the large price swings of the past few days have generated an apparent warning of what the future holds. She also added that volatility is likely to tighten financial conditions, which will slow the economy.
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