The big day came and went, the Fed’s and Mr. Bernanke did exactly as they had indicated and said in their forward guidance. The FOMC voted to leave everything in place. Asset purchases, forward guidance and interest rates. Investors seemed to be quite amazed. Reactions in the markets were drastic. Equities skyrocketed, the US dollar plunged to recent lows and gold soared. Just hours before the decision the global market debate was centered on how much tapering the Fed’s would do and how they would do it. All kinds of scenarios were put forward. On renowned investor said that the Fed would taper only 5 billion dollars and they would leave mortgage back security at the current level and drop bond purchases only. Others expected a change in forward guidance.
Scotia Bank printed the below base case scenario:
The Fed’s ultimate goals (we think) is to balance an overall dovish tone, trying to keep rates from moving higher but introduce tapering to balance oﬀ some of the building risks with the program. My base case is:
1) Tapering: the Fed tapers by $10bn weighted towards Treasury’s.
2) Thresholds: the Fed hints at the potential to lower unemployment threshold below 6.5% and the introduction of an inﬂation bound but does not act on either unless the economy softens or inﬂation falls.
3) Forecasts: lowers growth forecast, no change to the unemployment forecast and inﬂation to remain contained. The introduction of the 2016 forecasts is likely to show some moderating from the 2015 growth proﬁle and a further drop in unemployment.
4) Chair Bernanke’s tone: is to remain dovish by highlighting that this small ﬁrst step in tapering is not a tightening of policy but a shift in instrument mix and that interest rates are likely to remain on hold well after the 6.5% unemployment threshold is reached as it is not a trigger.
Just a day before Reuters printed the following: The policy-setting Federal Open Market Committee began meeting on Tuesday to discuss whether to trim its bond purchases, or quantitative easing. Many investors expect Fed chairman Ben Bernanke will announce a scale-back of purchases by $10 billion a month to $75 billion, while keeping rates close to zero.
“The ($10 billion) appears to be what investors are looking for, as long as the taper is not bigger than people were expecting the market will react positively,” said Paul Mangus, head of equity research and strategy at Wells Fargo Private Bank in Charlotte, North Carolina.
Marketwatch.com the online financial arm of the Wall Street Journal ran an article on just what effects tapering would have on the economy, even breaking it down and analyzing the differences if it is 5 billion or 10.
Wall Street ended the day with a bang. The S&P 500 immediately jumped to a new record high, and the Dow quickly followed. The Nasdaq also moved up after the Fed’s surprise announcement. All three indexes closed up more than 1%. The Fed’s moves also pushed down the dollar and drove up commodities. Gold prices spiked more than 4% following the announcement. Oil prices rose more than 2%.
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