An Historic and Successful Day for the Fed

December 18, 2013

Since Chairman Bernanke went public last May with a plan to eventually reduce quantitative easing, no other matter has drawn greater financial market interest.  The FOMC would implement this tapering of QE only when officials felt the economy and markets could handle it.  The Fed ended up delaying the onset of tapering longer than it anticipated initially, and great care was taken to decouple this initiative from the forward guidance for the Federal funds rate.  Today’s statement cut QE, the buying of Treasury bonds and mortgage-backed securities, by a combined $10 billion to $75 billion but was counterbalanced by 1) assurances that QE would wind down in measured steps and not be eliminated fully until much later in 2014 than insinuated originally and 2) a forecast that stressed the conditionality on expected inflation and job gains of the onset of interest rate increases and the indication that the jobless rate would likely be well below 6.5% when that happens.  This strategy of forward guidance worked well today.  Share prices rose almost 2%, hitting a record high in the Dow.  The 10-year Treasury yield closed below 2.90%.  Gold dropped nearly 1%, and the dollar rose strongly against the euro and yen.  Boston Fed President Rosengren dissented in favor of not tapering just yet.

In other key news on this historic Wednesday,

Significant progress was reported by European officials on reaching an accord to dispose of troubled banks and ultimately on creating a banking union of shared responsibility and resources.

Japan’s customs trade deficit widened in November both compared to October (with imports up 3.5% and exports off 0.2%) and relative to a year earlier imports soaring 21.1%.

The People’s Bank of China was again stingy in providing liquidity in the face of rising short-term interest rates.

The German business climate index compiled by the IFO Institute improved slightly to an 18-month high despite some slippage in current conditions.

British data showed sub-1% wage inflation, another big drop in unemployment,  and a huge 33-point increase in the CBI distributive trades survey index.

Ezone construction sector output fell 0.7% in both September and October.

U.S. housing starts posted the largest month-on-month increase since the start of 1990 and the highest level of starts since February 2008.

The Reserve Bank of India left its key interest rate unchanged at 7.75% in spite of fresh evidence that excessive inflation isn’t falling as much as hoped.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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