1. The Fed feels good about Uncle Sam
As widely expected, the Fed kept its interest rates at record lows and promised to do so in the foreseeable future. However, Bernanke’s gang also decided to reduce their monthly Treasury bonds and mortgage-backed securities purchases by another $10 billion, which brings down the total monthly asset purchases to $65 billion (from $85 billion in November).
If tapering $20 billion in six weeks isn’t enough for you, then you should know that the Fed also thinks that the economy “has picked up in recent quarters” and that the labor market has shown further improvement despite the release of mixed labor indicators. Last but not the least, the Fed isn’t worried about volatile activities in the emerging markets as it barely got comments from Fed officials. Talk about good vibes!
2. The Fed is ruled by the hawks
Whether it’s the Fed team’s parting gift for Bernanke or the FOMC is simply flocked by hawks, the Fed got a 10-0 vote in favor of tapering.
Since the Fed hasn’t seen unanimous results since June 2011, global investors took it as a sign that the Fed is committed to its tapering schedule and is REALLY confident on the economic recovery. Of course, it also didn’t hurt that Evans, Rosengren, Bullard, and George are out and replaced by hawkish Fisher and Plosser, dovish Kocherlakota, and neutral Pianalto.
3. Investors were NOT happy over tapering
No good story is complete without a twist! Investors apparently did NOT like the Fed’s continued tapering, as many felt that removing stimulus could derail Uncle Sam’s growth.
By the end of the day major US stock indices were down more than 1%, while yields on the 10-year Treasury note hit its lowest level since late October. Even the Dollar Index barely reacted to the news and recovered its post-FOMC gains less than an hour after the release. Yeouch!
Yesterday’s price action tells us that while the Fed’s optimism is a good thing, we also have to consider how major market players will react to it. The Fed will probably continue to taper but keep its rates steady in order to convince global investors of its commitment to steady growth.
What do you think of the Fed’s latest moves? Do you think that tapering $10 billion monthly is appropriate or do you prefer other policy moves?