Although The Federal Reserve does not set interest rates, it still has an effect on how rates react. Experts believe once the Fed's stimulus plan ends, rates will increase in 2015.
Barclays Plc. reported that rates are likely to not increase until nine months after the plan expires. This is a change from September when experts were predicting rates to increase in as little as two months.
The Fed has considered tapering its $85 billion-a-month stimulus plan by reducing its monthly purchases of Treasuries and mortgage-backed securities for quite some time. Gregory Whiteley of DoubleLine Capital LP told Bloomberg that many traders were fearful for their businesses when Fed Chairman Ben Bernanke first considered ending the bond program in May, but he said that those fears have been exercised over the last few months.
Improve the overall economy
The Fed believes tapering will help contain yields – income return on an investment – and assist borrowers who refinanced trillions of dollars of debt. Bloomberg reported that Treasuries have returned 0.62 percent since the beginning of September – a stark contrast from the previous four months when it lost 3.95 percent. Joe Ramos, a bond fund manager at Lazard Asset Management told Bloomberg that a moderate stimulus decrease will help the economy.
"Tapering is not a tightening, rather it's just a slowing down of the easing," he said. "Once the first tapering happens, and the market sees it is small, the 10-year yield will likely go back to what is a more normal level of around 3 percent."
Longer projection for interest rates
The Fed has mentioned the possibility of tapering earlier this year, when yields on 10-year notes rose 1 percent in May and June. Although Ramos believes that this moderate slimming down will be a positive contributor to the economy, that was not the original feeling. At the Federal Open Market Committee meetings in September, the central bank caught investors off guard when it didn't announce it would be tapering any purchases. This led to many investors believing that tapering would not begin until inflation increased.
Key issue for Bernanke's successor
The decision to taper the Fed's spending will be one of the key issues facing Janet Yellen, President Barack Obama's nominee to succeed Bernanke as Federal Reserve Chairman. Yellen said at her confirmation hearing that they will need to tread lightly because the U.S. has never been in this particular situation before.
"Now, this is challenging: We're in unprecedented circumstances, we're using policies that have never really been tried before – and multiple policies – and we're trying to explain to the public how we intend to conduct these policies," she said. "So, it is a work in progress, and sometimes miscommunication is possible."
But experts are not worried about disastrous results when the Fed decides to begin major tapering. Tad Rivelle, chief investment officer for fixed income at TCW Group Inc., believes the previous tapering consideration at the beginning of the year has prepared the economy.
"It probably won't be any different when the Fed ultimately is forced to taper: What you saw in May and June of this year was simply the dress rehearsal for the main event," Rivelle told Bloomberg. "This is a period where you start to skinny down and shrink your risk exposure."