ASX 200 shares jump as Fed flags bond tapering

The ASX 200 is rising after the Fed flagged bond tapering.

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The S&P/ASX 200 Index (ASX: XJO) is currently up around 1% to 7,371 points as the US Federal Reserve revealed its plans for bond tapering.

What did the Federal Reserve say?

The world’s most followed central bank noted that the US has made progress on vaccinations and there is strong policy support, whilst economic activity and employment have continued to strengthen.

Sectors that have been hurt most by impacts of COVID-19 have improved in recent months, though the rise in COVID-19 cases have slowed their recovery.

It was noted by the central bank that inflation is elevated, but it put that down largely to transition factors.

The Fed said that the path of the economy continues to depend on the course of the virus, though ongoing vaccinations will help reduce the impacts of the public health crisis on the economy. However, the central bank believes there are still risks to the economic outlook.

Inflation and employment targets

The Fed committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. Considering inflation has been high for some time, the Fed is going to aim for inflation to be “moderately above” 2% for some time. It expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.

It’s going to keep the interest rate target rate at 0% to 0.25% and expects to keep it at this level until the job market has reached “maximum employment” and inflation targets are also on track.

Reduction of bond buying

Central bank bond buying can have a supporting impact on the ASX 200.

The current bond buying situation is that the Fed has been increasing its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month. It was doing this until substantial further progress had been made toward its maximum employment and price stability goals.

If the economy keeps recovering as it is, then the Fed believes it would be warranted to slow down the pace of asset purchases.

According to reporting by the Australian Financial Review, Federal Reserve chairman Jerome Powell said the central bank could reduce asset purchases as soon as November and complete the process by the middle of 2022. Mr Powell also said:

The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate lift-off.

What has the ASX 200 done?

As mentioned, the ASX 200 is up around 1%, but within that there are different movers.

Looking at some of the biggest businesses, the Commonwealth Bank of Australia (ASX: CBA) share price is up 1.3%, the Fortescue Metals Group Limited (ASX: FMG) share price has increased 2.5%, the Macquarie Group Ltd (ASX: MQG) share price is up 2% and the Afterpay Ltd (ASX: APT) share price has risen over 4%.

Looking at the overall ASX 200, there are a few other ASX shares that have performed even stronger. The Bapcor Ltd (ASX: BAP) share price is up more than 6%, the AGL Energy Ltd (ASX: AGL) share price is up over 5% and the Corporate Travel Management Ltd (ASX: CTD) share price is currently up 4.6%.

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