For months now, everyone’s been keeping a keen eye on the US for an indication of when it will cut back its bond buying programme – the process that’s been used to stimulate the economy in the wake of the 2008 financial crisis. The US central bank, the Federal Reserve, has now finally announced it will begin this easing off – known as ‘tapering’. So what does this mean for investors?
1) Economic recovery, at last
Tapering is a strong sign of recovery in the most influential economy in the world – the United States – and is a clear indication that the financial system no longer needs extraordinary measures to support economic activity. There is a concern that tapering could unsettle stock markets in the short term, but a more stable growth outlook is ultimately good news. It leads to rising company sales, better margins and higher returns for equity investors.
2) Savers unlikely to benefit from better interest rates
Tapering is not a sign that interest rates are going to return to normal levels and, in fact, the Federal Reserve has been clear to state its commitment to ultra-low interest rates as we go through the recovery. We think interest rates on savings accounts are likely to stay below inflation well into 2015, which means that savers are likely to continue to lose money in real terms if they keep their money in the bank.
3) The good times are not here again – yet
While this announcement is positive news, the pace of growth will be a lot more subdued than it was just before the 2008 crash, for a number of reasons: there are budget deficits in the developed markets and there’s still pressure to reduce them, banks around the world are still cautious in their lending practices, and quite a lot of economic restructuring is needed in emerging markets.
4) Tapering will be a gradual process
We expect that the Federal Reserve will strive for sustained and steady growth over a long period. So, sudden and dramatic moves are not on the agenda. It seems most likely that the Federal Reserve will continue to be very cautious, weighing up the potential damage of being ‘behind the curve’ against moving too fast on further tapering.
5) The UK ‘tapered’ a while back
It was back in March that the Bank of England last bought government bonds. However, the situation in the UK is somewhat different to that in the US. The Bank of England still owns 43% of conventional gilts so the overall picture of bond holdings is skewed by that – and selling these bonds any time soon is very unlikely.
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