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Can Fed taper without increasing rates?

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The initial 'trial balloon' lofted by Federal Reserve Chairman Ben Bernanke didn't go so well -- by suggesting in June that the Fed might look to dial back its asset purchases, 10-year Treasury yeidls soared by more than a percentage point, taking mortgage rates along with it.

Now, the Fed is facing a tough question: when can it taper, and can it do so without creating a perception that doing so represents tightening of monetary policy?

Bloomberg reports:

The Fed is buying $85 billion of mortgage-backed securities and Treasuries each month. It will slow these purchases in March, according to the median estimate of 32 economists in a Bloomberg News survey conducted Nov. 8.

McCarthy predicts the Fed will try to push back expectations for an interest-rate increase to 2016 -- though he’s not sure how. He also said the Fed may cut purchases of short-term debt and maintain the pace of buying longer-term securities in an effort to anchor borrowing costs.

The famous economist Milton Friedman once said that "nothing is so permenant as a temporary government program." It appears the Fed is now facing precisely that sort of dilemma.

Source: Bloomberg
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