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The taper and you

January 28, 2014

In the last meeting of the Federal Reserve board, the decision to begin tapering was announced. Tapering, in its most basic form, is a gradual winding down of the process known as quantitative easing (QE), which is what the Federal Reserve has been doing since the financial crisis. The central bank has been purchasing $85 billion of bonds and mortgage back securities every month in order to deliver liquidity (cash) to the marketplace. The results of this program have been mixed – it has been argued that the vast majority of the benefits went to the top tiers of the economy, while little benefit was delivered to the rest of the economy.

With another meeting looming on the economic horizon, it is worth revisiting this topic.

With the announcement of the tapering, several events are now occurring that could have an impact on your money.

1) Emerging markets are being pummeled as money leaves these countries and returns to the more conservative markets such as the United States as rates have crept upward.

2) These money flows have the potential to keep interest rates low, but the fact that the Fed is tapering has the potential to offset these effects. Fewer dollars being used to purchase bonds and mortgage backed securities can very possibly lead to higher interest rates.

3) If emerging markets continue to weaken, there is a very real potential that this will have an impact on U.S. firms that export to emerging markets. These same firms and stocks are included in virtually all retirement portfolios, and many people work for these same firms.

Everything is connected.

Happy Reading!


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