After months of guessing and mixed signals from the Fed, the so-called “taper” of the quantitative easing program has finally arrived.
The market surged yesterday because the Fed’s taper was taper-lite. The Fed announced that the QE program would only be drawn down by $10 billion a month at each FOMC meeting next year ($5 billion fewer in treasuries and $5 billion fewer in MBS). This means the Fed will still be buying at least $500 billion worth of bonds next year. Then the Fed said that it would keep rates at between 0% and 0.25% until the unemployment rate drops below 6.5%, but it doesn’t see that happening in 2014. That’s longer than most analysts had anticipated.
You can see in the chart below that after opening at 1781.46 yesterday and dropping to a low around 1768.36, once investors understood the implications of another year of no interest, they spurred the S&P to a high of 1811.08 near the end of the day, closing at 1810.65. It turned out this taper wasn’t much of a taper at all, more like a new stimulus commitment from the Fed.
Related video: