December taper or not: 2 reasons easy money will likely continue

December taper or not: 2 reasons easy money will likely continue
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By Russ Koesterich, CFA
Chief Investment Strategist, BlackRock

Many market watchers are obsessed with when the Fed will begin tapering. However, those who expect the start of tapering to mean the end of easy money, and possibly of related market gains, are missing an important nuance. Russ explains.

As the Federal Reserve (Fed)’s December policy meeting approaches, many market watchers are obsessed with when the Fed will announce that it’s starting to scale back, or “taper,” its asset purchase program.

However, those who expect the start of tapering to mean the end of easy money, and possibly of related market gains, are missing an important nuance. While the Fed may start to taper as early as next month, the central bank will most likely maintain easy money policy by other means.

As I write in my new weekly commentary, there are two reasons why monetary policy is likely to remain accommodative for an extended period of time.

With growth uneven, the labor market fragile and inflation low, the Fed has significant latitude in how it adjusts monetary policy.  In fact, even while tapering, it can maintain accommodative monetary policy via other methods, such as through forward guidance on the path of short-term rates and potentially cutting the interest paid to banks on their excess reserves.

So what does this mean for investors? I continue to expect that short-term rates will remain low for long. Low rates, in turn, should help maintain high corporate margins, supporting the long-term case for stocks.

Russ Koesterich, CFA, is BlackRock Chief Investment Strategist and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

Source: BlackRock Weekly Commentary, Bloomberg

This article was produced by iShares and not by the Quartz editorial staff.


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