This is the moment of reality for the U.S. Federal Reserve’s message that tapering isn’t tightening.
At the conclusion of the December meeting of the Fed’s policy-setting Open Markets Committee (FOMC) it announced it would pare its monthly asset buying program by $10 billion to $75 billion. That provided some certainty to investors who have speculated over the timing of a start to the withdrawal of the Fed’s stimulus ever since Chairman Ben Bernanke raised the prospect publicly after the FOMC’s June meeting. At the post-meeting press conference Bernanke said he expected similar moderate cuts in the bond-buying program through most of 2014. He also reminded his audience that bond-buying is still bond-buying; the punch bowl that has fueled investors running U.S. equities to record highs this year, isn’t being taken away in one swipe.
But the central bank also stressed its intention to keep interest rates low for much longer than promised earlier, saying it “likely will be appropriate” to keep rates near zero “well past the time” the jobless rate falls below 6.5%. That was one of the previously set out thresholds for the Fed to review its effectively zero interest rate regime. The wording was both stronger and more formal — Bernanke said much the same in an earlier speech — than prior Fed indications that interest rates would be kept low for some time, a change intended to forestall any sharp market reaction that could undercut the recovery to the U.S. economy that has made scaling back the stimulus possible.
The initial reaction of equity investors to the Fed’s statement was to push down stock prices, then to push them up strongly. The yield on the 10-year U.S. Treasury bond also rose, then fell. The optimistic reading of that for the Fed is that it is finally starting to get its message across now it is actually tapering — or at the very least that it has got investors to focus on its policy guidance on prolonged low interest rates more than on its bond-buying cuts. The question now is how long skittish investors will remain so focused.