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Real test of Fed tapering still to come, economists warn

Real test of Fed tapering still to come, economists warn

Economists have said there are risks on the horizon, following news the US Federal Reserve will gradually start to withdraw its financial stimulus.

Yesterday, bank chairman Ben Bernanke revealed that it would reduce its £85 billion monthly asset purchases by $10 billion, a move welcomed by global markets.

Peter Dixon, global equities economist at Commerzbank AG noted that although it was announced this month, the tapering would not actually start until January, which was when we will see the real impact.

'We will see next year when people are back at their desks and fully focused,' he told Wealth Manager. 'When people focus more clearly on what's going on, that's when the Fed will be more nervous.'

But he suggested that, based on today's reaction, the markets seemed to understand that the Fed is going to  'give with one hand but take a little away with the other,' as the economy had strengthened so considerably. 

'The US economy is escaping from its debt trap and Fed tapering is just another sign of recovery,' Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment agreed.

But while this pick up in growth was good for stocks, he said that 'the prospect of eventual interest rate rises makes us cautious on government bonds and interest rate sensitive sectors of the stock market like consumer staples, utilities and property.'

Although the US central bank has stressed it is not anticipating a rate rise until at least 2015, Keith Wade, chief economist at Schroders, noted that while inflation is low, it is a lagging indicator, and looks set to rise.

'There are already signs that wages are responding to the fall in unemployment and as the labour market tightens further, which leading indicators suggest it will, price pressures will pick up,' he said.

 

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