NEW YORK (TheStreet) -- The Federal Reserve's decision to cut its monthly bond-buying program by $10 billion has surprisingly led equities to record highs.
Investors had believed that a cut in stimulus would cause to stocks to fall. The belief was that higher interest rates caused by less stimulus would reduce lending and dry up excess liquidity. That excess liquidity was the very reason equities were able to achieve record highs in the first place.
Investors, however, interpreted the news from the Fed as a positive review of the economy and a sign of more transparency. Tapering now, as opposed to some point in 2014, added clarity to an opaque wall with analysts' expectations on one side and actual Fed policy on the other.
All this year, investors had tried to predict when and if tapering would begin, leading to wild price swings and elevated volatility. A pattern developed where analysts predicted the chances the Fed would cut its bond purchases. The constantly changing predictions caused more market volatility. Then after the Fed made its announcements, traders went mad attempting to digest what the policy meant for future prices.This week's meeting finally put to rest the $85 billion question of when and if the Fed was going to reduce stimulus. Fed Chairman Ben Bernanke stated that the rewards of stimulus becomes less favorable when a central bank's balance sheet grows too large.
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