Controversy emerges over the impact of Fed Tapering

Different voices emerge to debate on whether it is a right time to take an action on tapering or not as the U.S. Federal Reserve announced on Wednesday that it will reduce its pace of bond purchases.

According to Forbes, the Fed is just easing up a small amount on the gas pedal and it will have negligible impact on economy. However, Bloomberg reported that Asian stock is rising on Fed Tapering and China share are retreating. Market Watch also affirms that it is the right time to taper and listed three reasons.

Bill Conerly stated that Fed’s taper will have negligible impact on economy on Forbes as he explains that the Fed is not hitting the brakes but just easing up a small amount on the gas pedal.As for financial markets, they might have been feared a more pronounced taper and are relieved that this is so minor.

Bill further explained that because QE2 began in late 2010 and probably triggered the stronger growth a year later, the little impact from QE3 has revealed, but the time lags are long. He predicted that perhaps we are in for stronger growth in 2014 because of the stimulus. Both QE1 and QE2 pushed up money supply growth dramatically. QE1 doubled the M2 growth rate, and QE2 had an even great impact. Since QE3 started, though, money supply growth rates have gradually declined. This indicates that the stronger bank reserves have simply been held by banks, not lent out to businesses or consumers.

Forbes reported that In the interludes, the economy did not plummet. The size of these reserve credit increases is huge by historic standards. Bill considered it as amazing that the economy was not sent into the stratosphere and he doubted that if the Fed were to suddenly suspend QE3, the real side of the economy—spending, production and employment—would show much impact.

In contrast, Bloomberg News affirms the impact of Fed tapering as Asian stocks is rising after the Federal Reserve expressed enough confidence in the U.S. labor market to taper asset purchases while promising to hold interest rates close to zero.

Bloomberg News announced that the MSCI Asia Pacific Index advanced 0.3 percent to 138.73 as of 2:34 p.m. in Hong Kong, with more than five stocks rising for every three that fell. The Fed said it will cut monthly bond purchases to $75 billion from $85 billion, a first step in unwinding unprecedented stimulus put in place to help the economy recover from the worst recession since the 1930s.

Shane Oliver, who helps oversee $131 billion as head of investment strategy at AMP Capital Investors Ltd. confirmed in Bloomberg News that “: It is a win-win for market. They are more optimistic on the employment rate and the economy while still keeping loose monetary policy in place with low rates to support the economy. We’re happy to stay overweight equities and if anything buy a bit more.

Also, three reasons were illustrated by “Market Watch, which is a Wall street journal to reaffirm that it is the time to taper now. QE3 was taken out as an insurance against fiscal drag and it is no longer needed. The Congressional Budget Office also forecasts that the economy would fall into a recession if Congress and the White House didn’t act to moderate the fiscal drag from huge tax increases and spending cuts that were legally required. Further, QE3 was a pre-emptive strike by the Fed to protect the economy from the politicians. The Fed contemplated tapering its bond purchases in September, but held off in part because of uncertainty over the impending government shutdown.

The journal believed that since a two-year budget agreement has been reached, the Fed can wind down QE3. With the outlook more certain, the insurance policy is no longer needed.