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Fed's Taper – No More Guessing

After much anticipation the Fed finally ended speculation and announced that it is going to slow down its quantitative easing program after all. In September I blogged about why a slow pullback of the monetary stimulus was not a cause of concern . While the taper announcement was not unexpected given the strengthening macro environment, the surprise lay in the stock market's response to the news. In the past any "taper talk" had resulted in markets getting jittery. But stocks rallied today after the news release. While initially surprising, this actually makes intuitive sense.

Firstly, the amount of the reduction being $10 billion per month was largely expected and priced into the market. Also it bolstered confidence that the Fed is retreating with baby steps and is not likely to spring a surprise on the economy.

Secondly, the Fed revealed a more sanguine outlook on growth and employment with expectations that the unemployment rate will decline to 6.3-6.6% by the end of 2014. So the real message to the markets here was that the economy is getting stronger and needing less help from the Fed is a good sign for business.

Lastly, the Fed sent a reassuring signal to markets by stating that it would maintain the fed funds rate near zero even after the unemployment level declined below 6.5% as long as inflation remained below its target rate. Since core inflation is still modest there is no urgent need to raise interest rates or substantially withdraw stimulus cash from the economy.