A Taper For The New Year

| December 20, 2013 | 0 Comments

InflationLeave it to the Fed to do the unexpected.  Just when we thought the central bank would leave its bond purchase program alone until next year, the FOMC threw us for a loop.

Indeed, the taper is in.

In a nutshell, the Fed will reduce its Treasuries purchases by $5 billion a month and its MBS (mortgage backed securities) purchases by $5 billion a month as well.  With a total of $10 billion in reductions, the total asset purchases per month will be $75 billion starting in January.

So what’s that mean for the economy?  Basically, not a darn thing.

You see, $10 billion less in bond purchases doesn’t amount to squat compared to the size of the economy.  And it still implies the Fed is going to be extremely accommodative with its monetary policy.

The whole purpose of this tapering was so that the FOMC could step into the reduction slowly – without creating havoc in the financial markets.  In this way, bond purchases could be reduced piece by piece over time.

But that’s not even the most important part…

The big news in the December Fed Statement had nothing to do with the bond purchases.  Instead, it was about interest rates, namely, keeping the Fed Funds Rate at close to zero.

Initially, the Fed’s stated target for unemployment was 6.5%.  That was the level where the central bank would revisit its historically low Fed Funds Rate.  However, in a major policy shift, the FOMC said rates could remain exceptionally low even after the 6.5% level is hit.

The reason… inflation, or low inflation to be precise.

Inflation is running well below the Fed’s target of 2% to 2.5%.  That’s the level that many economists feel would be healthy for economic growth.  Because inflation can’t seem to get to those levels, the Fed isn’t planning on altering its low interest rate strategy.

That’s big news to Fed watchers.  It could mean that instead of the markets waiting anxiously for jobs data each week/month, the focus will shift to inflation and price data.  CPI, PPI, and core inflation (among others) could be the new market movers now.

Overall, I think this is bullish for equities.  After all, low rates for a sustained length of time are good for asset prices.  As long as inflation remains low, rates will remain low.  While that may have always been the case, the Fed has made it a reality.

Yours in Profit,

Gordon Lewis

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Category: Breaking News

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.