In a fitting conclusion to his tenure as Chairman of the Federal Reserve, Ben Bernanke and the FOMC did exactly what they told the market to expect by voting to continue tapering the latest round of Quantitative Easing. This afternoon the Fed said it would reduce its purchases of securities and mortgage-backed securities to $30 billion from a previous $35 billion and add to its portfolio of longer-term Treasury securities at a pace of $35 billion per month, down from a prior $40 billion.
The total dollar value of QE of $65 billion per month is down from $85 billion at the end of November.
Stocks (^GSPC) initially shrugged at the news before resuming their 5th slide in the last 6 days.There are plenty of reasons to sell stocks lately and the Fed isn’t one of them. “This is exactly what was expected and I think that’s a good thing,” says Greg McBride of Bankrate.com in the attached video. The Fed is “sticking with the course of this slow, consistent taper in the context of a slowly improving economy.”
Heading into today’s announcement there had been some speculation that turmoil in emerging markets and disappointing jobs data would keep the Fed from reducing its controversial Quantitative Easing by another $10 billion. Adding slightly to the concern was a shallow but unusual drop in the stock market and generally weak earnings guidance from corporate America.
While noting recent weakness in the housing sector recovery the FOMC statement says the overall economic picture continues to improve:
“Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see 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 make a further measured reduction in the pace of its asset purchases."
Policy makers have vowed to keep rates near zero until well after the US unemployment rate falls below 6.5% or inflation accelerates. The unemployment rate stands at 6.7% and the most recent Consumer Price Index showed just 1.5% inflation over the last 12 months.
Bernanke heads for the end of his term at the end of the month with the taper program well established and stocks in what seems to the be the early stages of a long overdue, shallow correction. Whether you’re buying the dip or abandoning hope and selling everything you own, it’s unlikely that view was changed by anything the Fed said this afternoon.
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