Wednesday, December 18, 2013

FED TAPERS MARKETS SOAR

In a widely anticipated announcement, the Federal Open Market Committee announced today that they are beginning to taper the amount of money spent on a monthly basis to buy government bonds and mortgages.  The goal of the program (an aspect of quantitative easing) was to bring down and keep down interest rates so that money remained cheap and that investors would have to invest in the stock market to get any yield on their assets.  From a pure asset appreciation sense, the program has been largely successful.  However, it has not had the immediate desired effect on the economy and joblessness.  Furthermore, the jury is still out on the long-term effects of the program and how the Fed liquidates its massive holdings.  Today's announcement reduces the amount of bonds and mortgages purchased monthly by $10 billion - the Fed will still be buying $75 billion of government instruments.  The amount of the taper is relatively insignificant but the symbolic nature is not to be overlooked.  When the Fed hinted at a taper a few months ago, the markets quickly and sharply sold off.  Today, however, the market bolted upwards.  What has changed from a few months ago?  There were a couple of things at play today.  First, Chairman Bernanke let it be known that even though the Fed was reducing its buyback it was not considering increasing interest rates (the bigger part of quantitative easing) for some time.  Previously, the Fed had guided that the interest rate decision would be linked to the unemployment numbers.  Bernanke's testimony today made clear that unemployment measures would be less important than previously announced and that interest rates will remain low for some extended time.  Secondly, the economy continues to show some life and improvement, albeit very slow and in a two steps forward, one step back kind of way.  Nonetheless, things are improving.  Now we will begin to see if the economy is strong enough to stand on its own as the Fed begins to step aside. 

To many, the jump up today on the heels of the Fed announcement comes as a surprise.  However, one should still be careful as the knee jerk reaction to market moving news is oftentimes reversed as traders have time to reflect upon things.  Time will tell and we will know more in the next couple of days.  Regardless, it appears that Santa was sighted today and may be here for the rest of the year.

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