3 Ways Fed Tapering Affects Financial Markets
The financial atmosphere is thick with taper talk. Sooner rather than later, the U.S. Federal Reserve is expected to begin reducing asset purchases made under its third major round of quantitative easing (QE3) and this process, however gradual, is expected to impact markets around the world. The Fed could make a tapering announcement as early as this month, and already the prospect has affected the markets. Here’s how:
1. Rising Interest Rates
Perhaps the most obvious way that taper talk has spooked Mr. Market is the fact that the rate on the benchmark 10-Year Treasury note has increased by approximately 1.3 percentage points since May from about 1.6 percent to nearly 2.9 percent.
At a glance, the change may seem trivial, but before June, the 10-year yield had not broken above 2.5 percent since summer 2011. The federal funds rate has been trapped at the zero bound since 2008 and, combined with aggressive QE, the Fed has broadly succeeded in driving interest rates lower. Rates have come up significantly over a short period of time — a rate of increase that experts don’t necessarily expect to continue.