What Is the Federal Reserve Taper and Why Does it Matter to Investors?

If you’ve watched the financial news in recent months, you may have heard the Federal Reserve mentioned, specifically in regard to the “taper.” In this Fool Live video clip, recorded on Dec. 16, Fool.com contributors Matt Frankel and Jason Hall break down the taper in simple terms and discuss why it’s important for investors to know.

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Matt Frankel: Basically, the Fed, they’re trying to control inflation which, they called it transitory, that was, let’s just say a bad call. It doesn’t look like inflation is going to be as temporary as the Fed thought. The Fed has a couple of tools at its disposal, and interest rates are the ones that everyone knows about. But if the Fed raises rates, the idea is the consumer spending will decline, it gets more expensive to borrow money, and consumer savings will increase.

Mark just mentioned CDs, so interest rates and things like that will increase, and it makes saving more attractive. The combination of lower consumer spending and increased saving should make the economy cool off.

The Fed has another tool in its disposal which is what they call quantitative easing, which is a fancy way of saying printing money. What the Fed is doing is they are buying bonds. Up until November, they were buying $120 billion worth a month on the open market, a combination of treasuries and mortgage securities, which is a big reason mortgages that remained at record lows even as the economy recovers after the COVID pandemic because the Fed is buying mortgages left and right.

The idea of printing money is if you are just throwing billions of dollars that is newly created money essentially into the system, it’s going to stimulate the economy. The taper is the Fed’s word for gradually reducing these bond purchases that should start to tighten the economy a little bit.

Jason Hall: They say tapering, I guess, because weaning isn’t as nice of visual image as they want. But that’s basically what it is; it’s weaning the economy off of this really low cost, easily accessible liquidity.

Frankel: That’s really what they’re getting into. One big implication is you could see rising mortgage rates. Things like credit card interest rates are not directly correlated.

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