How investors learned to stop worrying and love the taper
So much for the "taper tantrum." For months, investors, stock analysts and the economic commentariat fingered their worry beads over how financial markets would react to the Fed starting to pull back on monetary stimulus.
The answer: Zzzzzzzz.
The response to the central bank's announcement Wednesday that it will start trimming its massive bond purchases in January has been a collective yawn. After soaring to record highs immediately after the news, stocks pushed even higher by the end of the week. The yield on benchmark 10-year Treasury bonds rose to its highest level since September, but didn't immediately take an elevator to the top floor, as some investors had feared. It remains low by historical measures.
As research firm Capital Economics put it, after all the build-up, the taper turned into a bit of a "damp squib."
To be fair, trepidation over the Fed starting to unwind its monthly purchases of mortgage and Treasury bonds wasn't entirely misplaced. Stocks sagged and bond prices plunged this summer after Fed Chairman Ben Bernanke telegraphed his plans to start withdrawing stimulus. Meanwhile, some of the run-up in equities since the Great Recession officially ended in 2009 does smack of a "sugar high" among investors hooked on Fed sweets.
Several reasons may explain why markets are taking the taper in stride. First, the Fed is only reducing its bond purchases by $10 billion a month. Investors were expecting a larger cut in stimulus, and policymakers made clear that they will keep monetary policy loose.
Second, in his news conference Bernanke emphasized the Fed's concern with inflation, which remains well below the central bank's target of 2 percent. The subtext: Although the job market is improving, which investors might expect to expedite the Fed's pulling the plug on its bond purchase, weak inflation could push out the time frame for shutting down the program entirely.
Third, and relatedly, the Fed said it would keep interest rates near zero "well past the time" that the nation's unemployment rate, now at 7 percent, sinks below 6.5 percent. That isn't forecast to happen until late 2014, which means the Fed's first rate hike may not come until later in 2015.
“In our view, the Fed’s policy stance should be market-friendly overall, especially for equities,” Bank of America Merrill Lynch analyst Michael Hanson said in a research note.
The bigger question is whether the Fed's stance will be as bullish for consumers and businesses, who after all drive the economy, as it is for investors.
That's to be determined. Peter Boockvar, chief market analyst with economic advisory firm The Lindsey Group, notes some dark clouds are starting to move in on the housing market. With mortgage rates creeping up, fewer homeowners are applying for refinancing and fewer house-hunters are pulling the trigger.
Of course, a slowdown in housing next year would likely force a re-think among Fed officials about when they finally pull the punch bowl away. But their fondest hopes for the new year are surely that, with economic growth picking up, the Fed's bond purchases will soon cease to matter. That would brighten everyone's mood.
Here are the major economic releases coming up this holiday week.
Monday, Dec. 23
- Personal income (U.S. Commerce Dept., Bureau of Economic Analysis)
- Personal spending ((U.S. Commerce Dept., Bureau of Economic Analysis)
Tuesday, Dec. 24
- Consumer durables (U.S. Commerce Dept., Census Bureau)
- Mortgage Bankers Association mortgage index
- New home sales ((U.S. Commerce Dept., Census Bureau)
- Federal Housing Finance Agency housing price index
Thursday, Dec. 26
- Weekly jobless claims (U.S. Labor Dept.)