Fed Watch: The Clock is Ticking

Fed Fed Fed.

That’s what you’ll be hearing all week long. Federal Reserve policymakers have a crucial meeting in Washington on Tuesday and Wednesday to debate when to scale back on the Fed’s massive stimulus program.

Stocks have been whipsawed recently as investors try to guess the Fed’s next move. Hopefully we’ll get clarity on Wednesday when the Fed announces its decision and Chairman Ben Bernanke answers questions on monetary policy strategy during his news conference.

Investors were feeling upbeat on Monday, hoping that the Fed will push off plans to trim back on stimulus. They are counting on Bernanke to go slow. They’re expecting Bernanke to say (1) the cut back on stimulus would come over the next few months, not right now; and (2) the tapering will be gradual, not an abrupt end of the bond-buying program.

Sounds reasonable, right? Maybe. Investors are still jittery about how all this talk of the Fed’s exit strategy will play out in reality. The Fed has never had to unwind this much stimulus before. As Philly Fed President Charles Plosser told me last Monday: “Judging how we calibrate the degree to which we turn up the dial or turn down the dial, is something we don’t have a lot of experience with … It’s a tricky problem.”

(Read More: The Fed’s Next Move—and You)

So why is all this such a big deal? It’s big because as the Fed pulls back on stimulus, interest rates will go up. That means bond prices will fall. We’ve already seen the yield on the 10-year Treasury jumping from 1.6 percent in late May to 2.15 percent Monday. As rates go up, and bond prices go down, people owning bonds, could be facing big losses.

Higher interest rates also mean higher mortgage rates. The rate on the 30-year mortgage is now at 4 percent and trending higher. That’s still a bargain historically. I remember paying 15 percent on my home mortgage in 1981. But psychologically, rising rates spook home buyers.

And brace yourself to see the impact of higher interest rates on your credit cards. When rates rise you’ll see them right away on what you pay for unpaid balances on your credit card bill.
So fasten your seatbelts. This could another tumultuous week for the markets.

(Read More: The Fed’s Hawks and Doves)

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