Outgoing Federal Reserve Chairman Ben Bernanke just had his last FOMC meeting. And Chairman Bernanke wrapped up his eight-year term with an announcement that shocked the markets today: The Fed will trim its monthly asset purchases by another $10 billion per month.
To recap, from September 2012 through November 2013, the Fed bought $85 billion in bonds each month in an effort to flood the market with liquidity. Then in December the central bank announced it was cutting its Quantitative Easing program to $75 billion per month. With the latest cut, it’s now $65 billion per month.
While the benchmark indices fell over 1% after the news, I wouldn’t respond to the selloff, and here’s why.
Starting next month, Janet Yellen will move into the top spot of the nation’s central bank. And as I mentioned last week, I feel pretty good about the Fed under Yellen. Janet Yellen is a dove, which generally means that she prefers keeping rates low to spur economic growth, even if it encourages inflation. This is important because she’s widely seen as an accommodative person. Yellen would be more resistant to stopping the Fed’s accommodative policies that Wall Street has gotten so addicted to.
So many expect that the Fed would pump more under Yellen than under a hawk. As far as the U.S. economy is concerned, the future is still a mixed bag, and there’s no doubt that the poor December payroll report is weighing on Yellen and the other Fed officials. Now there are a few more hawks on the board this time around, so there will be incremental tapering like from what we saw today.
However, I anticipate that the Fed will largely play it safe and keep the pump open as long as possible, and that there won’t be any drastic cuts to QE. And that is good news for the stock market in 2014.
In any event, I understand that these forces have introduced some volatility into the market, so I’ll be keeping a close eye on Wall Street and will keep you up-to-date on any relevant market news in this daily feature.