At the Fed meeting today, the U.S. Federal Reserve announced that it will begin tapering its bond-buying program by $10 billion per month starting in January. The policy, which was designed to recharge economic growth, will be scaled back to $75 billion per month from $85 billion per month.
The Fed will reduce its purchases of long-term Treasury bonds from $45 billion a month to $40 billion, and mortgage-backed securities from $40 billion a month to $35 billion.
The move was a surprise after months of intense Federal Open Market Committee (FOMC) meeting anticipation. Fed Chairman Ben Bernanke has been extremely pro-stimulus, and this was his last press conference before he steps down in 2014 and Janet Yellen takes over.
So, why did today's Fed meeting end in a taper, after months of staying the course?
Money Morning Chief Investment Strategist Keith Fitz-Gerald joined us in Baltimore to discuss.
"Bernanke's out of maneuvering room. He doesn't strike me as a 'fall on his sword' kind of guy, but I think what he's doing here is trying to clear the deck for Yellen's tenure," said Fitz-Gerald.
Bernanke said Yellen "fully supports what we did today."
Fed Meeting Today: The Details
In addition to a taper announcement, the Fed meeting today reiterated commitment to keeping interest rates low. According to the central bank, it will most likely keep its target interest rate near zero even after unemployment dips below 6.5%. That, however, is dependent on inflation (government-reported inflation, that is) staying below 2.5%.
In their economic projections, 12 of the 17 Fed officials expect the target interest rate to stay at or below 1% through 2015.
The Fed officials did express concern with inflation, as it continues to stay below the Fed's target of 2%. The central bank's preferred measure of inflation was up just 0.7% in October. If this measure of inflation does not start approaching the 2% target, the policies set today may not last long.
Following today's announcement, the markets fluctuated greatly. Initially dipping 67 points, the Dow Jones Industrial Average recovered quickly.
Following today's announcement, the Dow closed at 16,167.97, up 292.71 or 1.84%. The S&P 500 jumped 1,810.65, up 29.65 or 1.66%. The Nasdaq was up 46.38 points, or 1.15%, at 4,070.06.
Gold prices were initially down 0.8% to $1,220 an ounce at the time of the statement. However, gold for February delivery was trading up 0.9%, or $11.50, at $1,241.60 a troy ounce later in the day.
So what are investors to do now, with these market moves?
"Never, ever make decisions based on technical moves like this one," said Fitz-Gerald. "Three critical variables – price, risk, and potential – are dramatically out of whack when traders are forced into reactionary mode like they are at the moment. Let the computers duke it out."
The press conference following today's Fed meeting was also the final public appearance for Chairman Ben Bernanke, who will be stepping down at the end of the year. Bernanke's quantitative easing policy has upped the Fed's balance sheet to $3.99 trillion from $869 billion in August 2007.
Stay tuned for Fitz-Gerald's full Fed analysis for investors tomorrow morning.
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