FOMC Plows Forward with Measured Tapering

January 29, 2014

The decision to cut monthly purchases of mortgage-backed securities and longer-term Treasury Securities by $5 billion apiece matched analyst and investor expectations exactly and brings the cumulative combined lessening of quantitative stimulus to $20 billion per month from $85 billion to a new level of $65 billion.  The $85 billion amount was introduced in September 2012 and not cut until the December 18, 2013 meeting. 

The statement released today reveals no dissenting votes and makes very few changes to the December statement.  There is an upgrade in the characterization of growth from “expanding at a moderate pace” to “picked up in recent quarters.”  Consumption and investment were upgraded to “advanced more quickly in recent months” from “advanced.”  A third modification in the penultimate paragraph is the replacement of the word “now” with “continues to” in the prediction that “the committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the committee’s 2% longer-run goal.”

The statement did not mention the emerging market financial strains that in the past fortnight led central banks in Turkey, India, Brazil, and South Africa to boost their interest rates to safeguard floundering currencies and restore anti-inflationary credibility.  Fed tapering has been a prime cause of the stress in these economies. 

U.S. share prices had already been falling in January including today prior to the FOMC meeting, and the day’s losses were extended after the statement was published on the Fed’s website.  The DOW is down 4.8% year-to-date, still well short of the 10% rule of thumb constituting a “correction.”  It’s way too premature to talk about a nascent “bear market,” which would be a drop of 20% or more.  The 2.70% ten-year Treasury yield is 33 basis points lower than its end-2013 level and down five basis points on the day.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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