It’s been discussed for months, but it’s finally a reality: the Federal Reserve Bank has announced that starting in January of 2014, they will begin cutting back their Wall Street stimulus program. The question for investors is simple: will this cutback cause market volatility, and is another full-blown market collapse a possibility?
First, the facts. CBS reports:
In its final meeting of the year, the Fed’s rate-setting panel said Wednesday that starting in January it will cut its monthly purchases of mortgage and U.S. Treasury securities by a total of $10 billion a month, to $75 billion. The Federal Open Market Committee also said that the economy is expanding at a “moderate” pace.
“Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy,” the FOMC said in a statement.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.”
The Fed will cuts its purchases of mortgage-backed securities and Treasury bonds each by $5 billion. That means it will buy $35 billion in mortgage bonds each month and $40 billion in Treasuries. FOMC members approved the tapering decision by a 9-1 vote, with only Boston Fed Bank President Eric Rosengren opposing the move. He said the high jobless rate and low inflation made it too early to scale back the program.
“This is a toe in the tapering water, the absolute minimum reduction the Fed could announce without looking timid,” said Ian Shepherdson, chief economist with Pantheon Macroeconomics, in a research note. “Still, it is the first step away from incremental easing since July 2006, so it is significant.”
Whether it has been a sound policy or not, the reality is that it took massive stimulus from the Fed in order to keep the stock market on track. Now that the Fed has begun to pull back, how will the market react? And without continued stimulus, could the market regress towards the levels seen in 2008?
What would happen to your retirement portfolio if the market collapsed? Would you weather the storm—or would you be like millions of Americans in 2008 who lost huge portions of their retirement savings to market volatility?
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