The Federal Reserve sent shockwaves through the markets by unexpectedly announcing a tapering of its quantitative easing program.
First, the scoreboard:
Dow: 16,167.9 (+292.7, +1.8%)
S&P 500: 1,810.6 (+29.6, +1.6%)
Nasdaq: 4,070.0 (+46.3, +1.1%)
And now the top stories:
At the conclusion of its Federal Open Market Committee (FOMC) meeting, the Fed announced it was reducing its monthly purchases of $85 billion worth of Treasury and mortgage bonds by $10 billion. Some economists saw this coming, but most economists thought this first tapering announcement would come in January or April. In the Fed’s own words: “Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases.”
However, tapering is not a tightening of monetary policy. The Fed reiterated this point further by clarifying that it would keep interest rates low, even long after the unemployment rate falls under 6.5%, the threshold identified by the Fed a year ago. From the FOMC’s statement: “The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
The Fed also updated its economic projections. They now expect the unemployment rate to fall to between 6.3-6.6% in 2014. They also lowered their expectations for inflation while raising their expectations for GDP growth.
It’s worth noting that many experts warned that an earlier-than-expected tapering announcement would be bad for stocks. The exact opposite happened. In fact, today’s rally sent the Dow and S&P 500 to all-time record closing highs. Citi’s Steven Englander explained: “The Fed Statement is being viewed as a very dovish tapering – small reduction in purchases, indication weakening of unemployment trigger, UR trigger now conditional on inflation, no date for end.”
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