Taper

by Dave Schuler on December 18, 2013

The biggest news of the day appears to be that the Federal Reserve will begin its long-awaited tapering off of quantitative easing:

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

and, yes, I know that the animal whose picture is above is spelled differently.

I’m sure we’ll see speculation abound over what it all means. I suspect not much. Basically, instead of purchasing 90% of the long-term paper the Treasury is issuing, the Fed will be purchasing 80%.

I’m interested in the reactions of my commentariat on the move.

{ 6 comments… read them below or add one }

Red Barchetta December 18, 2013 at 4:40 pm

“and, yes, I know that the animal whose picture is above is spelled differently.”

But he sure is cute…………

“I’m sure we’ll see speculation abound over what it all means. I suspect not much. Basically, instead of purchasing 90% of the long-term paper the Treasury is issuing, the Fed will be purchasing 80%.”

What does it mean? Uh, I dunno. As you point out, they won’t move the needle.

steve December 18, 2013 at 5:24 pm

I think you should have gone with a better picture. (Strikes me as a move that affects Wall Street more than Main Street.)

http://www.save-on-crafts.com/magenta.html?utm_source=google&utm_medium=ppc&utm_campaign=google_shopping&cmp=google_shopping&kw=magenta&gclid=CLuGp9f0ursCFUjNOgod5DgAdw

Steve

Ben Wolf December 18, 2013 at 6:34 pm

It means government has decided the private sector should have fewer reserves and more bonds, or at least quantity of the first should grow less rapidly, and decline of the second do the same.

... December 18, 2013 at 6:44 pm

I stopped caring sometime last summer. Don’t know what this means, and I don’t really care. I’m sure that if Wall Streeters stop making money at a sufficient clip to keep purchasing $114,000,000 homes then the Fed will take action to insure they start getting their fair share again.

Red Barchetta December 19, 2013 at 9:09 am

After reflecting on it…..

Few people understand, including a certain frequent commenter, that the stock market rise is something like 85%+ reflective of valuations, and certainly not earnings (IIRC EBITDA down 15% from peak), a proxy for the economy. We see the same thing in PE, as the banks get frisky the increased debt capacity flows almost straight through to valuations. Good for business sellers, not necessarily for investors when the music stops. Expect it to only get worse as pensions increase allocation to alternatives.

But I still don’t think the Fed has moved the needle.

Ben Wolf December 19, 2013 at 6:37 pm

We have a whole industry of people who hang on the Fed’s every action as though the face of god will be revealed in the minutes of the FOMC’s latest meeting. As though the real economy pivots on whether dollar balances are shifted from reserve accounts to securities accounts rather than real production and real jobs and real demand.

Count the taper as another yawnfest.

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