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The Fed FINALLY Tapers

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December 18 turned out to be T-Day: the day on which the Federal Reserve finally tapered QE3. In making the move, the Fed acknowledged an improving economy; Wall Street quickly and enthusiastically applauded its decision.

The Fed will reduce its monthly asset purchases by $10 billion. QE3 will continue, but the central bank will buy only $75 billion of bonds per month starting in January. The $10 billion cut comes evenly across Treasuries and mortgage-backed securities; next month, the central bank will purchase $40 billion of the former and $35 billion of the latter.1,2

Fed officials voted 9-1 in favor of a taper. Boston Fed President Eric Rosengren was the lone dissenter on the Federal Open Market Committee, terming the action “premature” as the jobless rate had not yet descended to the Fed’s target of 6.5%.1,3

Market reaction: thumbs up. The 2:00pm EST announcement gave stocks a real boost; the Dow rose 292.71 for the day to 16,167.97, the NASDAQ gained 46.38 to 4,070.06 and the S&P 500 ascended 29.65 to 1,810.65. Judging by the rally, Wall Street seemed to agree that it was time for action.4

"I think logically, this is what they had to do," JPMorgan Funds managing director David Kelly told CNBC, reflecting a broad opinion. "If you look at what's happened this year, the unemployment rate has come down to 7 percent. We've got housing starts over a million units. We got the S&P 500 up 25 percent. In this economy, you have to pull back from the most extreme monetary policy in a century. So I think it's overdue. I'm glad to see it."3

Additional gradual reductions in QE3 may follow. At Wednesday’s press conference, Fed chairman Ben Bernanke noted that the central bank’s quantitative easing effort may be reduced in “further measured steps” determined in upcoming FOMC meetings.5

Could an interest rate decision be coming? The FOMC addressed that topic in its policy statement. It noted its intention to keep the federal funds rate at current levels “well past the time” unemployment reaches its target of 6.5%.5

What does this mean on Main Street? As the noted economist Peter Morici told MarketWatch: “The stimulus program was supposed to boost spending going in, so it’s going to reduce spending going out.”6

It may become slightly tougher to finance big-ticket purchases in 2014, especially if the Fed keeps reducing the scale of its monthly asset purchases as the year unfolds. National Association of Realtors chief economist Lawrence Yun commented to MarketWatch that homeowners who want to move (or move up) “need to realize that it could be more challenging a year from now.” Yun thinks the average interest rate on a 30-year home loan could hit 5% or even 5.5% sometime in 2014. Home improvement projects, student loans and auto loans may all grow costlier.6

Retirees, on the other hand, may see some financial positives if the Fed opts to tinker with interest rates next year. “Interest rates close to zero punish savers and retired folks,” University of Michigan-Flint finance professor Mark Perry reminded MarketWatch. “Right now, consumers are getting almost zero interest on their checking or savings account.” Perry estimates that under present conditions, American savers could realize $76 billion in additional interest income for every 1% that the Fed raises the key interest rate. Retirees and pre-retirees who dream of traveling more might also benefit in the near term – the dollar strengthened versus a basket of currencies prior to the central bank’s announcement, and an appreciating dollar certainly buys more overseas.6

Scott Bombeck may be reached at 877-956-7526 or sbombeck@acan.co. www.acan.co

Securities offered through Cambridge Investment Research, Inc. a Broker/ Dealer, Member FINRA/SIPC Investment Advisor Representative, Cambridge Investment Research Advisors, Inc, a Registered Investment Advisor. Cambridge and Acanthus Associates are not affiliated

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This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - marketwatch.com/story/fed-cuts-bond-buying-program-to-75-billion-2013-12-18 [12/18/13]

2 - marketwatch.com/story/fed-tapers-bond-buying-program-by-10-billion-2013-12-18 [12/18/13]

3 - tinyurl.com/ksu5mjo [12/18/13]

4 - markets.wsj.com/usoverview [12/18/13]

5 - tinyurl.com/mqdpmpf [12/18/13]

6 - marketwatch.com/story/what-fed-tapering-means-for-you-2013-12-18 [12/18/13]

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