What could slow down the taper?

by Ryan Smith20 Dec 2013
On Wednesday the Federal Reserve announced that it would taper its bond buying by $10bn per month, split evenly between its purchase of Treasury bonds and mortgage-backed securities.

Tapering the program will cause mortgage rates to rise as the Fed cuts back its mortgage-backed securities purchases. The question is, how fast does the Fed intend to wind the bond buys down?

Fed Chairman Ben Bernanke said in a press conference Wednesday that the Fed would most likely continue to wind back purchases, $10bn at a time over the next several meetings of its rule-making committee. However, he said, that decision was more of a flexible guideline than a hard-and-fast policy.

“The process will be deliberate and data-dependent,” he said. “…If the economy slows for some reason or we’re disappointed in the outcomes, we could skip a meeting or two. On the other hand, if things really pick up we could go faster. That said, my expectation is moderate steps going forward.”

Tapering will probably continue at a $10bn-per-month pace barring a significant reversal in the labor market, according to Bryan McNee, vice president and senior bond analyst for MBSAuthority.com.

“A reversal isn’t one report,” McNee said. “If you have a blip, that’s one thing. If you have two reports in a row saying nonfarm payroll is down or unemployment is up, then they might slow down.”

However, McNee did predict that the Fed would hold off on further bond-buying reductions at its January meeting.

“All the reports we’re getting now would be tainted by seasonal factors – more people going to work for the holidays and such,” he said. “They need a little more data.”



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