A must-know investor's guide to the Fed's asset purchase tapering

Part 4
A must-know investor's guide to the Fed's asset purchase tapering (Part 4 of 7)

Was the Fed’s October tapering announcement a surprise?

Key highlights from October’s meeting

At the Federal Open Market Committee Meeting (FOMC) held on October 29–30, the Fed decided to continue adding policy accommodation by purchasing additional mortgage-backed securities (or MBS) at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. Plus, the Committee reaffirmed its intention to keep the target federal funds rate at 0% to 0.25% and retained its forward guidance that it considered this exceptionally low range for the federal funds rate appropriate. At least as long as the unemployment rate remained above 6.5%, inflation between one and two years ahead was projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations remained well anchored.

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At this meeting, FOMC members also felt they could start looking at tapering their $85 billion-per-month bond buying program at upcoming FOMC meetings, provided this was backed by economic growth. According to the Fed’s statement:

“Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

Although inflation persistently dropped short of the Fed’s target rate of 2%, which threatened economic growth, the Committee expected it to fall within the target range in the medium term.

How did markets react to the Fed’s announcement?

The market yield on U.S. Treasury securities at ten-year constant maturity rose by 0.32% or 32 basis points from October 29, 2013, to December 17, 2013, to 2.85%. December 17–18 were the dates of the next FOMC meeting, and some market views expected the Fed to announce the onset of tapering at its very next meeting.

To find out whether these calls were proved right, move on to Part 4 of this series.

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