Amid raging speculation, last week the Federal Reserve ultimately decided against tapering due to concerns about the impact on the country’s recovery, which means it will not reduce its stimulus for th U.S. economy (i.e. its $85 billion per month asset purchase program). By postponing the pullback, the housing market is expected to experience lower interest rates much to the benefit of prospective buyers. Rising mortgage rates and government spending cuts are two key factors the Fed cited in its decision.
Making sense of the story
* When tapering does occur, there are two potentially detrimental
effects, namely higher mortgage rates and increased costs to the
federal budget. A strong economy is dependent on the housing
recovery, so if its progress is weakened, the impact will be
felt in the economy as a whole.
* Forbes expects tapering – when it takes place – to
remain “highly accommodative” in that it will not
raise short-term interest rates right away.
* Some estimates suggest tapering will begin in December since the
economy will be performing well during the peak of the holiday
* Any hint at tapering thus far has led to a sharp response in the
stock market, with shares rapidly being sold. Investors are
advised to plan for (and protect against) a sharp decline.
* Forbes asks a few key questions about tapering: “The time
will come when the Fed will begin to reduce its asset purchases.
How will this impact the financial markets? Perhaps more
important, have the financial markets become so accustomed to
the Feds easy money policy that the addiction is deeply
ingrained? In other words, has the stock market consumed
so much punch that the withdrawals will be severe?
* The Fed announced that it plans to keep its key short-term
interest rate near zero at least until unemployment falls to 6.5
percent, down from 7.3 percent last month.