Last week, Fed Chairman Ben Bernanke announced that in response to market conditions, the Federal Reserve would begin to scale down its bond-buying efforts.
“The Fed has scaled back its bond-buying efforts before only to restart them after disappointing performance from the economy,” commented Peter Mougey, a shareholder with the Levin, Papantonio law firm who directs the firm’s business torts and securities litigation departments.
In what was his final news conference as the chairman of the Federal Reserve, Mr. Bernanke commented that the economy is improved to a point that it no longer requires as much assistance from the Federal Reserve. However, he recognized that the economy still had a ways to go before it could be considered normal.
After a lengthy period of discussion on the subject, investors decided that the Fed should start reducing the amount of its monthly bond buying program from $85 billion to $75 billion. Investors were comforted by assurances that short-term interest rates would stay low long after the monthly bond buying program ends.
Stock markets responded positively to the news of the scaling back of the bond-buying program on the hope that a continually strengthening economy will offset the reduction from the Fed.
“As interest rates rise due to the decreased support from the Fed,” Mr. Mougey continued, “bonds prices will fall.” “Many investors who are not allocated correctly because of long-term interest rate exposure will have significant declines in their portfolios,” says Mougey.
The new bond-buying program will begin January.