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18 November 2013

Does “tapering” matter? 

Why are investors so focused on whether, or rather when, the U.S. Federal Reserve will start to cut back on its purchase of bond assets from the current level of $85 billion per month?

By buying bonds from banks, the program is intended to fuel bank lending to individuals and businesses, bolstering America’s economic recovery.

It certainly encourages the marketplace: investors recently added $4.2 billion to U.S.-based equity funds. The key driver? Hints from Federal Reserve Deputy Chair Janet Yellen, heir apparent to Ben Bernanke, that the Fed is in no hurry to start “tapering” back on the program.

Is it working? In fact, bank lending has increased by just $80 billion since the program was launched in September 2012, while bank reserves have grown by $800 billion. The U.S. economy has been growing anyway, seemingly unaffected by October’s government shutdown. 

Economists say the main effect of all the money being pumped into the U.S. economy has been to push up share prices.

At the moment, any suggestion that tapering could be imminent drives share prices lower and investor money out of equities (and even more out of riskier assets like emerging market shares and bonds.) Meanwhile, Fed suggestions that the program will continue push the stock market and fund subscriptions higher. 

Analysts say investors are basically hooked on cheap money, and any attempt to wean them off sends the market into cold turkey.