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To taper or not to taper

By Mark Hamrick · Bankrate.com
Monday, August 26, 2013
Posted: 2 pm ET

Amid volatility in financial markets tied to an anticipated scaling down of the Federal Reserve's economic stimulus, top economists are weighing in on when the central bank will make the change.

At issue is how and when to wind down the pace of $85 billion in monthly asset purchases. A survey of members of the National Association of Business Economics finds that 39 percent expect the Fed to begin to wind down the asset-purchase program in the fourth quarter of this year. Some 27 percent expect the deceleration to start in the first quarter of 2014. Just 10 percent see it happening in the current quarter.

Rates have risen anyway

The mere expectation of the shift has been widely linked to a spike in market-based interest rates, including mortgage rates, and a decline in stock prices. Federal Reserve board members have commented that any withdrawal of so-called quantitative easing is heavily dependent upon economic data and that a highly accommodative monetary policy is still appropriate.

Even so, mortgage interest rates have recently moved to the highest level in two years. Bankrate's weekly survey found the average of 30-year fixed-rate mortgages stood at 4.74 percent. The level was last seen in July 2011.

Outlook for benchmark fed funds rate

The NABE survey finds that a plurality of surveyed economists, 39 percent, believe the Fed will begin to raise its target for the benchmark federal funds rate in 2015 or later. Some 34 percent see it happening in the second quarter of 2014. Another 17 percent said they saw fed funds beginning to rise from the current target of zero to 0.25 percent in the first three months of 2014. Banks tie their prime lending rates to the fed funds rate, which in turn affects rates on a variety of consumer loans.

Bernanke a no-show at Jackson Hole

Release of the survey comes after last week's meeting of global central bankers at the annual economic policy conference in Jackson Hole, Wyo. While tapering of asset purchases remains the hottest topic of discussion among financial markets participants, Chairman Ben Bernanke chose not to attend the gathering, leaving Vice Chair Janet Yellen to represent the United States.

What the NABE survey doesn't address

Along with the question of taper timing, there's the lingering and increasingly politicized issue of who will guide the Fed in the years ahead. Bernanke is widely expected to be ready to depart the top post when his term ends in January 2014. In recent months, former Treasury Secretary Larry Summers has emerged as a new possible candidate to be nominated by President Barack Obama. Previously, Yellen had been seen as virtually unchallenged to succeed Bernanke. The person getting the nod and confirmed by the Senate will play the key role in shaping future decisions.

Follow me on Twitter @hamrickisms.

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