What the Fed's Tapering Could Mean

To taper or not to taper: that is the question—or at least it was until recently. The Federal Reserve's bond-buying program, which was put into place since shortly after the housing market collapsed in 2007, was originally designed as a short-term economic fix. Banks' and other businesses' accounting rules were based on the measure as they rode it out of the recession. Instead of tapering off, however, the economic stimulus program will continue—but why?

If the Federal Reserve's flip-flopping got you in a flutter this September, take heart. You're not alone. Wall Street stockbrokers, corporate CEOs, and other big-business figureheads all felt the increasing pressure acutely, and many companies adjusted their accounting rules in preparation. The Fed's latest—and somewhat unexpected—announcement put those new accounting rules on the shelf.

Rumors of the federal government's plans to taper its bond-purchasing program started circulated in early in 2013, after economists predicted an impending bond-bubble explosion. When the housing bubble burst, it triggered a recession, so the reaction to economists' woe-filled speculation was understandably negative—the prospect of another economic dip was too much to bear.

Some economists pooh-poohed the reports, even after a June statement by Ben Bernanke, Federal Reserve Chairman, in which the possibility of a fall taper was mentioned. Some, including OppenheimerFunds' chief economist, Jerry Webman, went as far as recommending that investors "not get caught up in … short-term market fluctuations and announcements." The pundits' skeptical interpretations now appear well founded.

The Federal Reserve's decision to continue its $85-million-per-month bond-buying program has dramatic implications for the banking sector as well as the economy in general. Fresh-start accounting rules put into place by reformed businesses after the economic collapse five years ago will stay in place, and bank accounting rules used to determine lending eligibility will also remain largely unchanged

If the economy grows stronger over the coming month, an October taper may still happen. With that in mind, a decision will likely not be made until the latest economic data becomes available to federal government officials. Until then, industry insiders urge caution and a big-picture approach to investment- and accounting-rule changes. Not everyone is paying attention, however: investors pulled almost $20 billion out of their exchange-traded funds and bonds in August.

Until recently, businesses and shareholders all over the United States were bracing themselves for an impending bond-purchase taper. Now, however, they can bask in the benefit of a little breathing room. Interest rates will remain low as further stimulus money pours into the financial sector, and the Feds appear unlikely to change their tactics until they see evidence of continued economic stability. Still, don't shelve those accounting rules yet: if recovery signs continue, the taper may not be far off.

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