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September or December taper—does it really matter?

Sunday, 18 Aug 2013 | 11:41 PM ET
Andrew Harrer | Bloomberg | Getty Images

As markets continue to speculate over exactly when the U.S. Federal Reserve will wind down its massive monetary stimulus plan, one economist says there is too much 'navel gazing' over whether the tapering move comes in September or December.

"Remember, we have $85 billion per month in terms of quantitative easing, and we're not talking about all of that going out of the window immediately," said Lim Say Boon, CIO of DBS Group Wealth Management.

(Read more: Will US yield spike derail tapering plans?)

Even if Fed tapering begins in September at a reduction of $10 billion incrementally a month, which means subsequently taking off $20 billion in October and $30 billion in November, Lim said the real impact on yields won't be much when December comes round.

"If you look at the research done over the impact of quantitative easing on U.S. Treasury yields, the conclusions are that each $100 billion of QE translates roughly to 5 basis points worth of U.S. Treasury yield," Lim said.

Fed tapering not the be-all and end-all: Pro
Lim Say Boon, CIO of DBS Group Wealth Management says that Fed's QE tapering is imminent its impact will be temporary as long as earnings and economy continue to grow.

"Say the 10 year U.S. Treasury yield is coming off by 5 basis points, (if we) flip it the other way around, what's $60 billion worth in terms of basis points? 3 basis points? Theoretically, it doesn't really amount to much and it really is the sentiment," he explained.

(Read more: Worst case for Fed taper: mere market 'indigestion'?)

"There's too much navel gazing over whether September or December."

Treasury yields have been rising since Fed Chief Ben Bernanke signaled in May that the central bank will begin a pullback of its third round of quantitative easing, put in place since September last year.

Yields on the 10-year Treasury jumped to as high at 2.825 percent on Friday, compared to the year-low of 1.632 percent hit in May.

(Read more: Here's what is benefiting from Fed tapering fears)

Lim said rising yields are a natural order of things as the U.S. economy recovers and investors should not over react.

September taper?
With a looming debt ceiling fight, is Fed tapering on its way? Brian Levitt, Oppenheimer Funds, and Matthew Slaughter, Dartmouth Tuck School of Business, weigh in.

"Let's go back to history. 40, 50 years: there has not been one bear market in the U.S. associated with the (yield curve) steepening," said Lim.

"Simply because, typically, rising U.S. Treasury yields reflect a stronger economy. Stronger economies translate into stronger index earnings growth. Which is why in almost every instance, inflection points in the 10 year U.S. treasury are associated with boom markets," he added.

(Read more: Fed outlier! No taper before year-end: Strategist)

While the recent record closes in major U.S. equity indices have sparked speculation that a stock correction is under way, Lim said he is not entirely convinced that the scenario will play out.

"The S&P 500 is looking stressed but that should not be all that surprising given that it has gone up fairly strongly over the past few months. (But) even on the technical indicators, the slow statistics are telling us that we might even have a little rebound. So I'm not entirely convinced," he said.

By CNBC's Li Anne Wong. Follow her on Twitter @LiAnneCNBC

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