Taper Your Enthusiasm: Fed May Reduce Bond Buying

The Federal Reserve remains fairly optimistic about the economic recovery, prompting Fed officials to consider tapering its bond buying stimulus program before the end of the year. The minutes from the latest Fed meeting in July state, "Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year."

The Fed has kept interest rates near zero and maintained the bond buying program to help the economy recover from the initial impact of the coronavirus pandemic last year. In recent months, the Fed outlook has remained relatively rosy despite rising inflation and a resurgence in COVID-19 cases this summer.

Scott Bishop, executive director at Avidian Wealth Solutions, thinks the Fed would do well to take a wait-and-see approach. "I think there's a very high probability that the earliest they'll begin tapering is in December," he tells KTRH. "But I think that's going to be pushed to give them another several months or a couple quarters to see how these COVID variants weigh on economic activity."

"I don't think the Fed wants to rock the apple cart, when we're already seeing retail sales slow down a little bit, and we're starting to see people maybe hesitant on travel," he continues.

Besides the COVID variants, there are other factors that could play a role in the Fed's actions over the next several months, starting with Congress. "Are the Democrats going to be able to get this reconciliation plan worth $3.5 trillion passed," asks Bishop. "If they get that through, that will give more cover for the Fed to slowly taper bond buying or possibly increase interest rates."

Then, of course, there's politics. Bishop believes the 2022 midterm elections will play a role. "Especially going into a very important election next year, the Fed tends to not like making significant changes during important election cycles," he says.

Photo: iStockphoto

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