It has been an unnecessarily distracting period as the markets have been labouring over an entirely anticipated decision by The Fed to take their foot off the quantitative easing accelerator. Finally, on December 18, The Federal Reserve said it would reduce its bond-buying program to $75 billion per month starting in January 2014, taking a step away from a policy meant to recharge economic growth, and said reductions will continue in “further measured steps” if the economy stays on course.
The Fed has suggested that in light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January 2014, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
Investment managers and other experts have repeatedly commented on the fact that the market has priced for the anticipated pull-back. As long as the pull-back is gradual AND employment, inflation and GDP continue to point in the right direction, equity and bond markets will teeter-totter to an irrelevant extent each time a policy announcement is made but otherwise it is time to move forward.