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The Fed in 2014: The Key Decision to Watch For

The Federal Reserve finally began its long-awaited reduction of bond-buying activity in its most recent meeting, setting the stage for an eventual end to quantitative easing. But there's still one key decision that the Fed hasn't yet made that could define the direction of the stock market for years to come.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the crucial element of Fed policy that hasn't yet been determined: the speed of future tapering. Dan notes that if the Fed keeps cutting by $10 billion per month at each of its meetings during 2014, quantitative easing will end before the year is out. But if there are pauses, it could push into 2015. Dan goes through the ramifications that could have, first focusing on bond investments Vanguard Total Bond (NYSEMKT: BND  ) and PIMCO Total Return (NYSEMKT: BOND  ) , and then turning to financial stocks JPMorgan Chase (NYSE: JPM  ) and Travelers (NYSE: TRV  ) . Dan concludes that the January meeting should give big clues about which way the Fed will move in the future.

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  • Report this Comment On December 29, 2013, at 8:06 AM, harry717 wrote:

    A bigger question should be, when is the media and the fed going to start telling the american people the truth behind all of the QE's? While yes it may help the economy by keeping interest rates down, the real reason is the $17 trillion dollars of debt the we now have. If the fed were forced to pay normal, historic average interest rates on the national debt, this would add over $700 billion per year to the deficit. Currently the average the fed is paying on the debt is 1.41% not the more normal rate of 5%.

    Consider if you will the rate at which our debt has grown over the past 15 years. Contrary to what politicians and the media that is in their pocket, will say, the deficit has been close to a trillion dollars for the past 12 years. Yes I said 12 years. This includes over six years that Bush was president. The only reason his deficits don't show up as trillion dollars per year debt is due to the surplus that "WAS" being generated from Social Security.

    President Reagan fixed the baby boom problem back in 1984 by increasing the social security tax, and the amount of earned income subject to that tax. This fix was supposed to provide surplus revenue to fund Social Security for the baby boomers. However, this money was spent on two wars and the Bush tax cuts. Now we are being forced to pay Social Security benefits out of the general fund because the current income from the Social Security tax is not going to be sufficient to meet the benefits due.

    Now that the deficit is finnaly going down and the projected deficit for this fiscal year is $700 billion dollars, the fed can now finally start reducing their bond buying. Again, not because the economy is doing so well.

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