The Federal Reserve takes the risky step of beginning the winding down process
The euphoria surrounding tapering of U.S stimulus throughout the last week or so has culminated in the Federal Reserve taking the risky step of beginning the winding down process. The Central Bank refrained from taking any exuberant steps, instead deciding to trim the pace of its monthly asset purchases by $10billion to $75 billion. Policy makers have cited considerable strength in the U.S economy as a key reason behind the scaling down process, with a sustained recovery now in sight.
Fed Chairman Bernanke made clear at his last conference that asset purchases would be cut at a measured pace through much of next year if job gains continued as expected. Consequently, the move to taper will be seen as a clear sign that the economy and labour markets have continued to improve. In a move that will hopefully calm investors in such a volatile period, the Federal Reserve suggested that its key interest rate would stay at rock bottom even longer than previously promised.
The Fed launched its third and latest round of quantitative easing, or QE, 15 months ago to kick-start hiring and growth in an economy recovering only slowly from the recession. Its first program was launched during the 2008 financial crisis. The Fed has held rates near zero since late 2008.
Bernanke said he consulted closely on the decision with Fed Vice Chair Janet Yellen, who is set to succeed him once he steps down on January 31 after eight years at the helm. Investors took the action as a validation that the outlook for the economy was improving. After a brief pullback, U.S. stocks rallied sharply, with both S&P 500 and Dow industrials closing at all-time highs.
– Max Cohen
PM Analysis –
European bourses surged this morning
European bourses surged this morning playing catch-up to the US after the tapering decision saw a 1.7% rise the Dow last night. The frenzy appears to be winding down today with the Dow down 45 points and Unemployment claims coming in higher than expected at 379k. The taper of $10billion a month was seen as nominal given the foreword guidance on interest rates keeping them at record lows for the foreseeable future. The fact that tapering has been announced should reduce the volatility around future FOMC meetings whilst maintaining enough easing to hopefully ensure a stable recovery. With US existing home sales and Manufacturing Index out at 3.00pm should it miss forecasts expect a flurry of volatility as speculators overreact.
Gold is selling off today after a brief surge yesterday breaking the 1200 mark as investors continue to pump money into equities with interest rates being kept low and the relatively small taper. After the recent volatility in equities and the failure of gold to rally even in those market situations suggests investors don’t see gold as such a safe haven anymore.
– Alex Conroy
Original Post
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