In economic analysis circles, the big news over the last few months has been an expectation that the Federal Reserve will reduce its asset purchases. Right now, the Fed is buying $85 billion a month from the Treasury, in an attempt to increase money supply and stimulate the economy. However, as the economy improves, the bond buying is supposed to come to an end. Rather than shock the economy by eliminating the purchases all at once, the Fed plans to step down, or taper, off the purchases gradually.
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Many had expected that the Fed would begin tapering this month, but the results of the September FOMC meeting are that the taper is being putting off. This was a huge shock to the market — which had already priced in the beginning of the taper.
So what happens next?
According to the Atlantic, what happens next depends on the economic recovery. The actual taper probably won’t start until the debt ceiling and budget issues are resolved, and until there is some solid evidence that the current economic recovery is sustainable.
Since stimulus supports lower rates and better stock market performance, the recent jump in mortgages rates (in expectation of the start of the taper) might ease, and stocks are likely to remain somewhat supported (although volatility is still an issue). When the taper does finally start, consumers will have to be on the lookout for higher interest rates. While mortgage rates are likely to be most affected, other rates also tend to go up.
The Atlantic points out that many analysts see the end to the bond purchase program as a precursor to an increase in the Fed Funds Rate, and that could change a great deal, although rates are likely to remain low for a couple more years.