Why Fed stimulus program scale-back news made markets perk up

The Federal Reserve says the economy is now strong enough to let the Fed reduce its bond-buying stimulus program.

Wednesday's decision came earlier than many investors expected. Stocks jumped after the announcement. The Dow Jones Industrials gained nearly 300 points, ending the day at a record high.

So what about the Fed's decision made Wall Street perk up?

CBS News contributor and analyst Mellody Hobson said it's the measure of certainty the announcement brings.

"The stock market hates uncertainty and that's what we have had all fall. 'Will they, won't they?' It's been like this game of cat-and-mouse," Hobson said. "Everyone has been waiting to see how will this happen, what will they do. They've been true to their word when they used the word taper. They said it would be measured, $10 billion is not radical. They're easing up on the gas ever so slightly. This is not a jarring move, and the market finally has some visibility, how they're going to unwind the stimulus. And the other thing, the stimulus is still there."

Hobson said the whole situation is "actually very, very good."

She explained, "It shows that finally we have very clear indications that the U.S. economy is on much steadier footing."

Hobson continued, "This is after a really tough slog. The Federal Reserve is looking at a bunch of indicators -- unemployment, 7 percent, better than people expected. They're looking at inflation that has stayed completely under control. They're even looking at Congress who finally decided to play nicely and put together a budget deal that lays out U.S. spending for the next two years. So this is all a very good sign."

Turning to the Fed and interest rates, Hobson noted the Fed knows they have to keep rates low in order to keep growth going.

"They know that they need to give businesses incentives to investment spend, to go out and borrow money to build plants, facilities, build inventory, because that will continue to drive job growth," she said. "They're targeting unemployment next year at 6.2 percent to 6.4 percent by the end of the year, which would be a great story. They also want us to go out and buy houses, which means mortgage rates have to stay down, buy cars, again, so car rates stay down, go to school, which means student loans stay down. All of these things they're looking at in terms of rates, and I think that's actually really smart."

For more with Hobson, watch her full analysis in the video above.


  • Amanda Cochran

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