If you follow any finance nerds on Twitter or watch CNBC, it’s going to be hard to avoid hearing the word “taper” today. But what the heck is it?
“The taper” is the label the financial press and the markets have slapped the Federal Reserve’s decision to start slowing down their massive purchases of long-term government debt and investments backed by mortgages, whenever it finally comes down. The reason they call it that is the Fed’s purchases are likely to taper off gradually, rather than be cut off suddenly, which would definitely harm the economy at this point.
Why should you care? The Fed has been using those purchases to push down long-term interest rates, especially on mortgages, to try and get the economy going. Regardless of when the Fed decides to start tapering — and it’s a when, not an if — it’s probably going to result in the stock market having a few bad days or even weeks, and mortgage rates rising. But the timing is important: taper too soon, and you hamstring the recovery; too late, and it could spark excessive inflation.
Fed members have been hinting that they were considering a taper all summer, but economic indicators lately has been kind of tepid, so it’s hard to say whether they’ll begin today. The markets will be scrutinizing the statement the Fed puts out at 2 p.m. and Fed Chairman Bernanke’s presser afterword for any hints of taper talk. If they see anything that looks remotely like that, your 401(k) balance or brokerage account will probably take something of a hit as the market prices in the rise in interest rates that’s likely to result.
So do you think the Fed will taper today?
Update: Don’t fear the taper — the Fed decided to hold off this time around. While they made it clear they’re keeping a close eye out for signs that it’s time to ease up on their purchases, they’re standing pat for now. Expect rejoicing on Wall Street and at your mortgage broker’s office.