The Federal Reserve is about to taper its $85 billion in monthly bond buying – meaning that the economy is beginning to recover.
On Wednesday the Federal Reserve is predicted by analysts to reduce total monthly asset purchases by $15 billion or less.
The majority of economists think that it makes the most sense for the Federal Reserve to cut back on Treasuries first.
After the collapse of Lehman Brothers – which nearly crumbled the entire financial system – the Fed injected a massive amount of stimulus. It was a move that saved the economy from collapse.
However, according to Diane Swonk, chief economist at Mesirow Financial:
“We have come a long way, and we often forget how far we’ve come. At the heart of the crisis, people didn’t think there was a tomorrow. Now we know, there’s a tomorrow.
We just don’t know how strong it is. Sometimes the cure has its own dangers and you have to look at those tradeoffs. That’s where the Fed is. Is the cure good enough for the risks?”
According to a group of economists polled by Reuters, housing starts will rise, but building permits and existing home sales are predicted to fall.
In fact, a few Federal Open Market Committee (FOMC) members may actually vote against any tapering at all – in light of August’s somewhat disappointing jobs report.
Luca Paolini, chief strategist with Pictet Asset Management in London, told Reuters:
“But there’s always an announcement effect, which in this case could be especially powerful because we are moving from free liquidity for all to a landscape where a lot of investors have the perception that we’re beginning a tightening cycle.”