Taper Tip Toe

on Thursday, 19 December 2013. Posted in ,
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QEJust when you thought it was safe to head off on Christmas leave, the US Federal Reserve goes ahead and tapers.  The equity markets of course rose, which is the opposite of what they have done before every other taper rumor.  That might be due the fact it is something of a taper tip-toe shuffle rather than a taper cliff dive that some people feared.

Prior to last night, the Fed was buying bonds at a rate of $85 billion USD per month.  Now it is a measly $75 billion a month.  The slow pace of this decline as well as the Fed’s promise to keep its benchmark rate low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

This means that the Fed isn’t going to stomp all over the recovery any time soon.  It also means that the Fed will be providing stimulus for a long while yet, provided inflation stays low.  And inflation has remained low without any hint of a rise.

The lessons from this are:

 Staying in the market is a good idea. 

Getting in after a good an almost 2% rise last night means you missed a lot of fun. There is a solid chance the market will gap higher tonight (the announcement was relatively late in the day), thus meaning you’ll miss even more fun before you get in.

 BERNAKEThe US Federal Reserve isn’t stupid.

They aren’t in the business of flipping around and make radical changes in policy in ways that lead to short-sighted self-harm.  They aren’t the US congress after all.  Expecting them to do otherwise is more than a little foolish.

The final link this morning is from a money manager with a tremendous track record, Mohammed El Arian from Pimco.  His thoughtful summary is here.

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