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What Does The Fed's Decision Really Mean?

Federal Reserve

The Fed shocked financial markets Wednesday afternoon with a decision to hold off on tapering its $85 billion per month in asset purchases intended to stimulate the economy.


Market Reactions

The S&P 500 has surged to a new all-time high, gold rallied sharply, the U.S. dollar sold off, long bonds rallied, while interest rates fell --all expected market reactions in the wake of the news.


The Economy

Federal Reserve officials have repeatedly stated that the start of tapering was data-dependent, and recent economic figures have shown signs of economic slowing into the third quarter. Many economists have been warning that a taper in September was not a done deal and the Fed proved them right. A key concern has been that the drop in the overall unemployment rate is not a reflection of a stronger job market, but instead the result of long-term job seekers dropping out of the labor market.


Rising Rates

In its policy statement, the Fed also mentioned that recent tightening in financial markets conditions could weigh on the overall economy and even reverse some of the recent job market improvement. Long term interest rates have been rising since the Fed has hinted that tapering would begin this year. Now, t he Fed may be attempting to "talk down" long term interest rates in the hopes of keeping the lending conditions easy.


Black Clouds

Looking ahead, there are a bevy of economic challenges ahead, including the looming battle over the debt ceiling and the continuing resolution to keep the government running. The gridlock on Capitol Hill has proven unsettling to markets and worrisome to businesses and consumers. It impacts business investment, job creation and consumer confidence.

While the Syrian situation has calmed for now, it remains in the background and geopolitical uncertainty, with the threat of a spike in oil prices remains another economic black cloud.

The Federal Reserve registered a vote of economic concern with Wednesday's announcement. At some point monetary policy normalization will occur. But, the Fed is saying they don't think the economy is ready just quite yet.


Timing for Tapering?

For now risk assets will continue to rally. Liquidity fueled trends will continue. The next target for tapering is December 17-18. Why then? That's the only FOMC meeting this year accompanied by a press conference. The Fed will want to offer up additional details when it does begin to pull in the reins on its monthly bond purchases. The October 29-30 FOMC confab does not have a scheduled press conference in place.

Also, with Janet Yellen as the front runner to replace Ben Bernanke, she is widely expected to keep the liquidity spigot open as long as it takes.

Risk on.

 

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