The Federal Reserve likely will start pulling back its stimulus program soon, but that doesn't mean interest rates are going up, former Dallas Fed President Robert McTeer said.
After the June Fed Open Markets Committee meeting, Chairman Ben Bernanke rattled markets when he disclosed that the central bank was likely to begin tapering its $85 billion a month in bond purchases this year, with an end date of 2014.
The markets mistook that to indicate that the Fed might start tightening policy by raising rates simultaneously.
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McTeer said that while the asset purchases will begin slowing soon, that doesn't mean a rate reversal is imminent—meaning the market is confusing tapering with tightening.
"A lot of people in the market overreacted to talk of tapering," he told CNBC.com. "It's an absolutely natural thing to do. It does not mean tightening monetary policy, as the chairman continues to emphasize."
Bernanke's biggest potential mistake would come from trying to do too much to preserve his legacy, McTeer said.
"It may be unfortunate that his term is up when it is. It may put a little pressure on him to make some moves before he leaves that will put the Fed on the course he thinks it will be on," McTeer told CNBC.com. "I worry that his departure might cause him to do that prematurely."
The Fed's calculus in deciding when and how it will begin pulling back on its twin stimulus programs of bond-buying and near-zero interest rates has been critical to marker behavior.
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