Investors unfazed by Fed’s plan to begin ‘modest’ tapering in January

Members of the Federal Reserve’s Open Market Committee wound up a two-day meeting today by announcing that the Fed will begin tapering its $85 billion-a-month purchases of Treasurys and mortgage-backed securities in January — news that could put further pressure on mortgage rates.

Bond prices and yields move in opposite directions, so as the Fed cuts back on its purchases of those investments, yields are expected to head up. Mere talk of “tapering” has already pushed long-term yields up by more than 1 percent since this spring.

While investors initially reacted to the announcement by selling off stocks, shares quickly rebounded with the major indexes reaching new highs for the day.

“I think people were prepared for this, and I think they are relieved that the Fed is starting,” Wayne Kaufman, chief market analyst at Rockwell Securities in New York, told Reuters. “No one wanted this 800-pound gorilla in the market.”

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the Fed said in a statement released at the conclusion of today’s meeting. “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.”

In order to minimize the impacts of tapering, the Fed emphasized that it will likely keep its target for a key short-term rate — the federal funds overnight rate — at between zero and 0.25 percent for even longer than previously expected.

With inflation in check, the Committee “now anticipates … that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” Source: federalreserve.gov

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