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Global Macro: The Fed Reduces Uncertainty

Andrew Sachais

NEW YORK (TheStreet) -- The Federal Reserve's decision to cut its monthly bond-buying program by $10 billion has surprisingly led equities to record highs.

Investors had believed that a cut in stimulus would cause to stocks to fall. The belief was that higher interest rates caused by less stimulus would reduce lending and dry up excess liquidity. That excess liquidity was the very reason equities were able to achieve record highs in the first place.

Investors, however, interpreted the news from the Fed as a positive review of the economy and a sign of more transparency. Tapering now, as opposed to some point in 2014, added clarity to an opaque wall with analysts' expectations on one side and actual Fed policy on the other.

All this year, investors had tried to predict when and if tapering would begin, leading to wild price swings and elevated volatility. A pattern developed where analysts predicted the chances the Fed would cut its bond purchases. The constantly changing predictions caused more market volatility. Then after the Fed made its announcements, traders went mad attempting to digest what the policy meant for future prices.

This week's meeting finally put to rest the $85 billion question of when and if the Fed was going to reduce stimulus. Fed Chairman Ben Bernanke stated that the rewards of stimulus becomes less favorable when a central bank's balance sheet grows too large.

Fed officials tried to give more clarity about their plans for the future, which led to an spike higher in equities to record levels on Wednesday. Meanwhile, as expected, SPDR Gold Shares  sold off for two reasons.

First is due to the inverse relationship between interest rates and commodities. Gold is priced in U.S. dollars and is used to hedge inflation when the dollar value falls. It became less desirable to investors when the Fed cut stimulus, which caused the dollar's value to increase.

The second, and the more telling aspect, is that more transparency about policy has reduced investor anxiety. The constant guessing game over the past few months of when and how the Fed would taper dominated investing premises.

Fundamental influences such as earnings and valuation ratios were neglected. Now with the beginning of tapering, traders can focus more on fundamentals.

GLD data by YCharts

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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