How Will a Tapering Look?
Tapering isn’t an immediate, dramatic event. Instead, it is likely to take place over an extended period of time so as to create minimal market disruption. Also, as Bernanke says, it is going to be dependent on economic conditions. The Fed may pull back slightly if the economy continues to strengthen, but it could also increase the program again if the economy slowed or the financial markets were shocked by an unforeseen crisis.
The takeaway is that tapering doesn’t represent a sudden end to QE, nor is it likely to be a steady, predictable decline. Instead, it will be a bumpy process that takes place over a period of a year or more.
Nevertheless, Bernanke’s May 22 statement represented the clearest signal yet from the Fed that it may begin to pull back on its stimulus policy, and that it may even do it in 2013 (sooner than investors had been expecting). At least initially, the markets have responded unfavorably to this realization.
'via Blog this'
