What's going on?

In a statement following its latest meeting on Wednesday, the US Federal Reserve (�the Fed�) appeared to confirm that it will announce steps to unwind a key crisis-era program in September.

What does this mean?

The main news from Wednesday�s meeting was that the Fed said it would begin, essentially, selling bonds it bought as part of its quantitative easing program �relatively soon�. Most investors took this to be a clear signal that the Fed would announce the details of this process in September and that the selling would begin soon after (technically, the Fed will stop reinvesting proceeds from bonds it currently owns rather than actually selling bonds � click here for more background).


Since it will be buying fewer bonds each month, the Fed will likely put downward pressure on bond prices; conversely, that would push up bond yields (a.k.a. interest rates). In short, it�s another way for the Fed to increase interest rates � which acts as somewhat of a headwind for the economy by making it more expensive to borrow, and thus spend, money.

Why should I care?

The bigger picture: A weaker US dollar makes it easier to take this action.

The US dollar has lost about 8% of its value versus other major currencies so far this year. The weaker dollar makes it easier for companies to sell their goods overseas and boosts the profit of US companies that have international operations (because their overseas earnings are worth more when translated back to US dollars). These easier conditions offset some of the headwinds created by higher interest rates � and thus likely give the Fed more confidence that the economy can withstand its new policies.


For markets: However, the Fed also suggested low inflation is concerning.

Remember, the Fed wants inflation around 2% � but it�s currently below that level. Higher interest rates make it harder to generate inflation because people tend to spend less when it costs more to borrow money � and thus there is less upward pressure on prices. If inflation remains subdued, the Fed is much less likely to increase its �target interest rate� later this year (however, it looks like it will decrease its bond buying regardless).