Insights & Advice


What the Fed Taper means for you


This week the Federal Reserve Bank announced the beginning of the end of its years-long support of the financial markets.  Granted, $10 billion per month of reduced purchases is a baby first step, but over the next year, the Fed is hoping they can reduce its bond buying altogether.

For the overwhelming majority of Americans, the fact that the central bank has begun to taper its $85 billion/month of bond purchases is good news. It reflects their view (and mine) that both employment and the economy overall are gathering momentum.

In yesterday’s policy statement, The Federal Open Market Committee took great pains to promise that they would keep short-term interest low until after the unemployment rate dropped below 6.5%. They said nothing about longer-term interest rates. We can expect to see medium and long-term interest rates (but not short-term) continue to climb for the foreseeable future. That means that the return you can get in a money market fund or certificates of deposits of one year or less will remain abnormally low.

If you have been vacillating on whether to take out a15 or 30 year mortgage now, or wait for lower rates, don’t wait any longer—commit. On the other hand, if you have been hoping against hope that the price of that long–term U.S. Treasury bond or municipal bond you hold is going to regain its former premium price level—forget about it.

You, who remain unemployed and about to give up, don’t. Corporations and small businesses will take their cue from the Fed. If the Fed sees growth, and they do, corporations will begin to add to capacity. That means more jobs. As time goes by, those of you who are not satisfied with your job, for whatever the reason, good news is around the corner. More job openings, at better salaries, with more opportunities usually accompany economic growth, so get your resume ready.

Stock market investors also benefit. Market participants can deal with the good and the bad, but uncertainty is a stock market killer. For most of this year, investors have been waiting and worrying about the impact of the Fed’s taper. It is true that quantitative easing was an experiment born of necessity. During the financial crisis, the Fed had no choice but to step in to avoid a melt-down of the entire financial system.

The experiment continued as the Fed then tried to use monetary stimulus to grow the economy and stem unemployment. No one knew what would happen or if they would succeed. Would the end of stimulus trigger a collapse in the financial markets? Would the Fed get it right, tapering at the same rate as the economy grew? Would interest rates spike and stock markets swoon?

These were all legitimate concerns and now we appear to be getting some answers. True, it is still early days and tapering has just begun, but so far so good. It appears that the Fed just might pull off the greatest experiment in modern financial history and benefit us all to boot.





Posted in Macroeconomics, The Retired Advisor