The FOMC Decision
The FOMC delivered a dovish statement on Wednesday. The stock market responded in a dramatic fashion, though bonds, the U.S. dollar and gold did not move all that much.
In my view, the S&P 500's rise was too strong given the FOMC statement and the response of other markets.
The Fed reduced its purchases of securities by $10 billion a month, to $75 billion a month; $5 billion less in Treasuries, to $40 billion; and $5 billon less in mortgage-backed securities, to $35 billion. I am a bit surprised that the FOMC did this in December (though economic data over the last week or so lifted my expectation of a tapering a bit) -- I thought January or March were more likely.
However, as I previously expected, the tapering announcement was accompanied by dovish forward guidance.
The dovish forward interest rate guidance was "the committee now anticipates that it will likely be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines well below 6.5%, especially if projected inflation continues to run below the committee's 2% longer-run goal." This statement was dovish from two vantage points:
1) The FOMC had been saying that a 6.5% unemployment rate was a rate at which it would consider lifting the fed funds rate -- the current statement says "well below 6.5%" before FOMC will consider lifting the fed funds rate.
2) The statement today elevates the inflation rate, and this rate is expected to stay below the 2% target through 2016.
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In offering up a dovish statement, the FOMC intends to keep short rates low and limit any rise in bond yields.
Twelve of the 17 participating members believe 2015 is the appropriate time to tighten, and the consensus fed funds rate at the end of 2015 from the committee is 75 basis points, 25 basis points lower than in the September report.
I would add that the question and answer session with Bernanke seemed a bit more hawkish than the Fed's statement in that the Chairman did not suggest that moving back into aggressive quantitative-easing mode was an option.