As many predicted, the Federal Open Market Committee (FOMC) meeting today ended with the announcement of more taper – cutting monthly bond purchases by $10 billion a month to $65 billion.
The U.S. Federal Reserve will reduce its purchases of long-term Treasury bonds from $40 billion a month to $35 billion, and mortgage-backed securities from $35 billion a month to $30 billion. The decision to continue the taper was unanimous among the FOMC’s 10 voting members.
According to the central bank’s statement, the Fed cited an uptick in economic activity and improving labor indicators for reasons to continue tapering.
The Fed reiterated its plans to keep interest rates low until the unemployment rate reaches its target point of 6.5%.
Even though more tapering was expected, the markets didn’t like what they heard.
How the Stock Market Reacted to FOMC Meeting Today
The Dow Jones Industrial Average had been down around 136 points on the day before the Fed news and was down more than 200 points immediately following the announcement. The Dow pared some of those losses before closing down 189 points, or 1.2%.
The S&P 500 finished the day down 18.3 points, or 1%, and the Nasdaq lost 46.5 points, or 1.1%.
The sell-offs in emerging markets like Turkey, Argentina, and China have been even worse than in the United States.
“No matter how they try to spin it, the shift to less stimulus is extremely disruptive,” Money Morning’s Chief Investment Strategist Keith Fitz-Gerald pointed out this week. “Every time the Fed has edged up to it, the markets have stuttered.”
Most analysts say that the Fed will continue tapering moving forward – but we know that with Janet Yellen in charge, things could change for the Fed in 2014…
What to Expect Moving Forward
The January FOMC meeting was Ben Bernanke’s last as the central bank’s chairman. Current Vice-Chair Janet Yellen will replace Bernanke on Feb. 1.
While many expect the Fed to continue tapering QE in $10 billion increments, the central bank specifically stated that there is no preset timetable for ending the program. The Fed stated that tapering will “remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”
Money Morning Chief Investment Strategist Keith Fitz-Gerald said recent economic data does not justify a taper, which could mean a change in 2014 as Yellen plays the hand she was dealt.
“I continue to believe that the numbers do not justify a taper and that we will see Yellen re-engage the printing presses, even if she calls the ‘innovative’ market actions she's supported something other than stimulus later this year,” Fitz-Gerald said.
Yellen’s first FOMC meeting will take place this March.
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The Wall Street Journal:
Fed Stays Course on Bond-Buy Cuts, Looking Past Emerging Market Tumult
Fed Officials Unite Behind Taper as Yellen Era Begins: Economy