The Federal Reserve announces a taper of $10 billion, with $5 billion on each type of assets: MBS and Treasuries. Market expectations were mixed towards the December decision and no specific policy was priced in. Some had expected a “Dectaper†while others saw a reduction of bond buys coming later on. In addition, it isn’t this decision alone, but also what accompanies it, which can make choppy and wild market moves.
Towards the all-important decision, the dollar was somewhat stronger against most currencies, with the exception of the pound. EUR/USD was at around 1.3760, USD/JPY at 103.15 and GBP/USD at 1.6385. EUR/USD dropped below 1.37 but returns to pre-announcement levels. GBP/USD is already above 1.64. USD/JPY is rising. Update: the dollar strength is reversed now.
Live blog: Bernanke explains the sweet taper
Analysis: Sweet Dectaper is still a taper – USD has the upper hand
Update: Taper 2: Fed announces $10 billion taper – USD advances
Statement highlights
Forward guidance is the sweetener:
The Committee now anticipates, 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 6-1/2 percent,
Fed member Eric S. Rosengren dissented from the dovish angle. The hawkish member Esther George voted with the majority.
Further moves are data dependent, no preset course. The outcome is Scenario No. 4 in the preview.
The Fed also released economic forecast: 2014 growth is now expected to range between 2.8% to 3.2%. The unemployment rate is at 6.3% to 6.6%. Core PCE inflation is expected to range between 1.4% to 1.6%. The growth range is wider, unemployment is now expected to be lower and inflation lower.
Background
The US economy was showing signs of steady yet slow growth: jobs growth was getting closer to the important 200K figure, forward looking PMIs remained positive and Q3 GDP accelerated, albeit it was inventory related. The world’s No. 1 economy managed to shrug off the 16 day government shutdown and a new budget deal prevents a shutdown in January.
In addition, the Fed managed to separate tapering expectations from rate hike expectations. All these and more are part of the 11 reasons for QE tapering.
However, inflation remains weak and it is unclear that the US economy can walk on its own. In any case, the statement is only the first part, and Bernanke could swing to the other direction in the press conference.
The outcome is Scenario No. 4 in the preview
