Mickey Levy, a veteran Fed watcher, said investor fears that the Fed would eventually scale back its monthly bond purchases were overdone.
"think about it: the Fed has a portfolio of $8.5 trillion, buys an extra $120 billion a month and reinvests all maturing assets," Levy, Berenberg Capital Markets's chief economist for the United States and Asia, said in an interview on Tuesday. "if you slow down and buy only $105 billion a month, what impact will it have on the economy or financial markets?"
He added: "there is no impact on the economy."
Levy pointed out that Federal Reserve Chairman Jerome Powell has said that the cut will not affect when the Fed will consider raising interest rates.
Levy points out that bond yields may rise slightly after the Fed announces the reduction, but yields are already ridiculously low, so it really won't make much of a difference.
However, the market will ponder the Fed's policy and the rise in inflation.
"as the Fed gradually reduces its size, how will the bond market and the stock market react eventually as interest rates normalize?" Levy said. Bond yields are bound to rise and return to normal levels, in line with the long-term goal of stabilizing low inflation and sustained economic growth. This is the real dilemma facing the Fed. "