Why Some Traders View Fed Tapering as Tightening
When the Federal Reserve begins to scale back its $85 billion-a-month quantitative easing program, it's still going to be buying bonds—lots of them, in fact.
But traders and investors seem to view tapering as tightening—basically seeing any slowing in purchases as the end of easy money, even though the process is expected to be gradual.
"Tapering is not tightening," Tom Higgins, macro strategist and chief economist at Standish Mellon Asset Management, said Tuesday on CNBC's "Squawk Box."
"Yes it is," countered another guest, Paul Schatz, market strategist and president at Heritage, "because if the Fed could have gone to negative interest rates they would have. QE is a form of having negative interest rates."
This debate is among the thorny issues that central bank policymakers need to navigate as they embark on their Tuesday-Wednesday meeting, which will be followed by a policy statement and a Fed Chairman Ben Bernanke news conference. Market participants will be looking for any guidance on when the tapering might start and how it would be executed.
(Read More: Roubini: Fed Exit Strategy Will Be 'Treacherous')
The Fed has "done a very good job of telegraphing [that] once the taper begins, it's on its way to zero," Schatz said. "I do think tapering is further off. But if it's not, I think the first taper is going to be so tiny."
"[We] believe there will be tapering in the second half of this year," Higgins predicted. "The Fed will take down that $85 billion in asset purchases down to closer to $65 billion. And we think they'll signal that … in the press conference after the meeting."
He said he thinks tapering will begin sometime in the fall—the latest in December, if "there's a deterioration" in the economic data.
(Read More: Greenspan: Taper Now, Even If Economy Isn't Ready)
Using the metaphor that the market on QE is like a drug addict, Schatz said, "Whenever we get off the drugs, whenever we get off the IV, we're going to have some pain. So you want to have your pain … pick your year. … Whenever we off the drugs it's going to hurt the body."