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How Will the Federal Reserve’s Taper Affect You?

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Federal ReserveIn an effort to stimulate the economy, the Federal Reserve has been using quantitative easing measures to increase the amount of money circulating.

After the Fed dropped rates to between 0% and 0.25% following the financial market crash of 2008, the body decided that more needed to be done to boost the economy and get the money moving through the system. As a result, the Fed began making asset purchases, mostly of Treasuries. The result of this has been an increase in monetary supply, especially since the most recent incarnation of quantitative easing strategies involves monthly asset purchases.

But, with economic data indicating improvement, the Federal Reserve has now announced that it is getting ready to taper its asset purchases. While the quantitative easing won’t all end at once, the taper will, nevertheless, impact consumers.

Impact of the Taper

Even though the taper hasn’t gone into effect yet, David Houle, CFA and investment manager with Season Investments, points out that just the announcement of future tapering is having an impact. “Expectations of Fed tapering have already caused long-term interest rates to rise,” he says. “The primary way this impacts consumers is by making mortgages more expensive and housing less affordable.”

Indeed, mortgage rates have already jumped a bit recently (I’m glad I completed my refinance months ago), and some surveys indicate that would-be homebuyers are starting to show reluctance to go through with a purchase. On top of that, credit card interest rates are also likely to rise as the taper goes into effect, making it harder for consumers to pay off debt.

That’s not all, though. “Tapering may also impact consumers’ moods if it weighs on asset prices in their 401ks,” Houle continues. And, once consumer sentiment begins to drop, so, too, does spending, and the economic recover could be in jeopardy. The tapering will have to be carefully managed in order to avoid that.

What Can You Do to Reduce the Impact of the Taper?

In order to get ready for the impacts that might be coming as a result of the taper, you need to plan ahead. Thomas Balcom, an adjunct professor at Barry University and founder of 1650 Wealth Management, points out that now is the time to lock in rates while you can.

“I have pleaded with my clients and students to refinance their mortgages while experiencing historically low rates,” he says. “In addition, I have recommended reducing the duration on their bond portfolios to repare for tapering and the accompanying increase in interest rates.” With rates rising, now might be time to position yourself to take advantage of better bond investing opportunities down the road.

It’s also probably a good time to pay down consumer debt (like credit cards) before rising interest rates take a bite out of your payments.

But it’s not all bad news. “While tapering will adversely affect most consumers, it will have a positive impact on savers,” Balcom points out. “It will allow them to earn more interest from their savings accounts and CDs.”

So, as you consider what the rest of the year is likely to bring, think about how the timing of the Fed’s taper efforts might impact you.

(Photo: Tim Evanson)

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7 Responses to “How Will the Federal Reserve’s Taper Affect You?”

  1. I’m really tired of ultra low saver interest rates, so I’m eagerly anticipating the end of QE and rising interest rates.

  2. Jeremy says:

    I am super frustrated because I was stuck in the middle of that turn. We were in escrow on a home and were waiting to sell our home. With the spike in interest rate, our home stopped getting quality offers and thus we lost our rate lock. Within 45 days, the rate went up 1.5% and pushed us out of the new home. Happened almost exactly like you said in the beginning of the post.

  3. Emilio P says:

    I strongly believe that if QE3 continues much longer, we’ll have a serious risk of devaluation of the US dollar, and international banks will dispose of US reserves at an even faster rate.

    • uclalien says:

      Saying “international banks will dispose of US reserves at an even faster rate” implies that foreign banks are disposing of US debt. This couldn’t be further from the truth.

      Foreign banks hold ~$5.68 trillion of US debt (as of May 2013). This amount has increased from ~$5.27 (as of May 2012). In other words, foreign banks have increased their holdings of US debt by 7.8% in the past year.

      All the talk from China about decreasing their US debt holdings is mostly political posturing. Over the past year, China has increased its holdings of US debt by 13%.

  4. Some folks believe that the fed will taper, but not really exit buying MBS until 2018. There could be a much longer period of low interest rates than many folks believe.

    It’s a race to the bottom with all countries printing money like it’s going out of style.

  5. uclalien says:

    As an advisor to public agencies, my objective is to get them (and taxpayers) the best they can achieve when issuing debt to finance new projects or refinance old debt.

    The mention of tapering has had a dramatic impact on my finances and the finances of most public agencies. For example, we had the opportunity to save one city $1.1 million by refinancing their old debt. Since Bernanke’s comments last month, the savings has completely disappeared. In the end, everyone loses (e.g., city, taxpayers, bond holders, and me).

    Please don’t construe this in any way as me advocating QE1, QE2, QE3…QE47. I feel quite the opposite. However, it’s important to point out the impacts of a taper (or even the discussion of a taper).

  6. Stephanie says:

    I need Vermont for 10,000 if someone had and wants to split?


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