One of Janet Yellen’s first challenges as Federal Reserve chairman will be figuring out how to cushion against a lurch in interest rates when she pares the pace of the central bank’s bond buying.
After sending 10-year Treasury yields more than a percentage point higher by fueling taper expectations in May and June, policy makers now are grappling with their options when they do reduce debt purchases that have swelled their balance sheet to a record $3.91 trillion.
The Fed’s failure so far to convince investors that tapering on its own doesn’t constitute a tightening of policy creates the risk of more market volatility as the central bank communicates about tools it’s never used.
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