So the Federal Reserve is doing exactly what it said it would do, sticking to the plan of reducing the amount of bonds it buys by about $10 billion a month. That puts its monthly purchases of U.S. Treasuries and mortgage-backed securities at $65 billion, down from the rate of $85 billion it kept through most of 2013.
Given this is the second time in two months the Fed announced a reduction in its massive, five-year quantitative easing policy, it’s fair to say that the dreaded taper is now in full-swing. At this pace, the program will end before the year is up. The U.S. economy and, more importantly, the stock market will have to stand on their own. Apparently, after more than a year of speculation, someone just told Wall Street.
Wednesday’s announcement from the Federal Open Market Committee kicked what was already a pretty steep stock market selloff into high gear. By 3:30 p.m., the Dow Jones Industrial Average was off more than 1 percent, having shed nearly 200 points. It finished with a slight rally that limited the day’s damage to a 189-point loss.
This is the opposite reaction the market had to the Fed’s initial announcement of the taper. A month ago, when the Fed said it was finally reversing course and reducing the amount of bonds it buys, stocks responded with what seemed like a sigh of relief that the pullback was so small. The S&P 500 responded with one of its best days of the year, rallying 1.7 percent in a few hours.
“Today the reality of the taper finally starting to sink in,” says Scott Anderson, chief economist for Bank of the West. Judging by the severity of the midday selloff, Anderson thinks some traders were betting on the Fed holding fast at $75 billion a month and delaying another step down. Once the announcement came in that the central bank would lop another $10 billion off its monthly purchases though, people were stuck holding stocks they didn’t want, and a fire sale was on. “I think the Fed surprised people today,” says Anderson.
This wouldn’t be the first time that’s happened. In September, the Fed seemed to fool everyone when it announced it would not slow its bond buying quite yet. That amounted to a huge pump fake to the market’s expectation of a “Sept-taper.” (Plus the death of a really annoying econosphere Internet meme.) But that was a dovish surprise. Today’s was a hawkish one, especially since it comes in the face of so much turmoil in emerging markets.
Essentially, though, the Fed sees enough strength in the U.S. economy to continue pulling back. That’s good news. And for the first time since June 2011, outgoing Fed Chairman Ben Bernanke got a unanimous vote on a policy decision from his fellow FOMC members. All 10 votes were cast in favor of buying fewer bonds.
As Janet Yellen takes over as chairman next month, she inherits what at least appears to be a group of policy officials more united than they’ve been in a couple years. Is that good news?
