Tapering could threaten 'already feeble' recovery

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The Federal Reserve is expected to announce Wednesday that it will begin tapering its $85 billion-a-month purchases of Treasurys and mortgage-backed securities. The purchases have helped keep interest rates low, but mortgage rates have been heading up since Fed Chairman Ben Bernanke telegraphed plans for tapering in May.

“Despite assurances that the stimulus would be withdrawn gradually and that interest rates would not rise any time soon, investors have been pricing in a turning point in the financial cycle,” Reuters reports. “If yields shoot even higher after this week’s Fed meeting, confidence will be rattled, the already feeble housing-driven U.S. recovery could stumble and investors in emerging economies might again start rushing for the exit.”

Fed watchers including Pimco’s Mohamed El-Erian expect the Fed to taper its asset purchases by $10 billion to $15 billion — not because the economy is back, but because the risks of continuing the program are starting to outweigh the rewards. El-Erian told CNBC today that he thinks weakness in the economy will prevent interest rates from rising even as the Fed continues to taper next year.

Separately, the Fed has promised to keep the short-term federal funds overnight rate close to zero until employment picks up significantly. News that former Treasury Secretary Lawrence Summers has withdrawn from consideration as Bernanke’s successor has investors betting that the federal funds rate won’t be hiked until December 2014, Reuters reports. Last Friday, traders thought there was a better-than-even chance of a rate hike in October 2014. Source: reuters.com.