The markets were braced for last week’s meeting of the Federal Reserve Board’s Open Market Committee. The issue at hand was tapering. The Fed has been purchasing $120 billion in bonds and mortgages per month to support the markets. It has been assumed all along that these purchases would taper off as the economy recovers.
We were all set for an announcement regarding the timing and pace of tapering at this meeting. However, the disappointing jobs report for August had many questioning whether we might see a further delay in the announcement. On the other hand, perhaps the announcement would contain a timetable or pace of tapering which was altered. Keep in mind that tapering is not likely to happen all at once, as the definition of tapering includes the word “gradual.”
In reality, the Fed statement after the meeting did not contain any surprises in this regard. It indicated that a “moderation in the pace of asset purchases may soon be warranted.” What is the big deal regarding tapering? Let’s go back to our discussion of supply and demand. If there is less demand for mortgages and bonds, this could cause interest rates to rise. Keep in mind that the Fed’s plans could change at any time, and we have another jobs report to be released next week which could be a factor within this equation.