A must-know investor's guide to the Fed's asset purchase tapering

A must-know investor's guide to the Fed's asset purchase tapering (Part 1 of 7)

A must-know investor’s guide to the Fed’s asset purchase tapering

Quantitative easing

Last December, the Fed had announced its first tapering, or pullback, of its bond buying program. The program, which had started over a year ago, consisted of buying $85 billion worth of Treasuries and mortgage-backed securities (or MBS). In December 2013, the U.S. Federal Reserve announced that it was reducing its asset purchases by $10 billion per month, split between $5 billion from agency MBS  and $5 billion from longer-term Treasuries. This move preceded a similar announcement on January 29, 2014, reducing open market purchases by the same amount.

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In the January meeting, the Fed also reiterated that its accommodative monetary policy stance and maintenance of the Fed funds rate to between 0.0% and 0.25% would likely continue well after the unemployment rate reduced to below 6.5%, keeping in view the Fed’s longer-term goals of full employment and its inflation target of 2%.

When did the Fed first hint at a taper? Key highlights of the meeting held April 30–May 1, 2013

To support a stronger economic recovery and help ensure that inflation, over time, is at the rate most consistent with the Fed’s dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month in the meeting held from April 30 to May 1. The minutes of this meeting also mentioned that the Fed would continue to maintain its “highly accommodative monetary policy stance” well after the asset purchase program ended and the economic recovery strengthened.

To read more about the key insight that emerged from that meeting, read on to Part 2 of this series.

The Realist Discussions

  • James

    So, if the investment inflow is greater than the reduction in FedGov purchases due to tapering the AGG should continue to rise even during periods of moderate increases in interest rates?