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How Will the Federal Reserve’s Taper Affect You?

In 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 [3] 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 [4] 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 [5])