BREAKING: The Fed taper begins as stocks spike upward

Long-feared Wall Street Photo: Jacquelyn Martin/AP File

WASHINGTON, December 18, 2013 — The Federal Reserve announced  Wednesday afternoon that it has decided to reduce its $85 billion a month of bond purchases by $10 billion commencing in January, claiming a stronger U.S. job market, a move that seems politically expedient but does not reflect the true U-6 unemployment number which is much higher.

The U-6 unemployment figures are still in the low teens, reflecting the large number of people who have run through their unemployment benefits, have given up looking for work, or have taken unacceptable part-time work in lieu of working full time. These unemployed Americans are left off the official unemployment rolls, allowing the Administration to claim that its nearly non-existent employment policies are working.

Regarding its first actual move to “taper” its bond buying program and thus begin to repair its balance sheet, the Fed statement says it will take further steps to reduce the pace of the purchases next year if that improvement continues.

The reduction to $75 billion a month is small but significant step because it signals that Fed policymakers are ready to ease their massive support for the economy provided since the Great Recession—support that has enormously improved the pricing of homes and stocks but support that has actually scarcely touched the badly damaged finances of the average American who never benefited by the Fed’s largess.

To cushion to impact on financial markets, the Fed strengthened its commitment to record-low short-term rates. It says it plans to hold its key short-term rate near zero “well past” the time when unemployment falls below 6.5 percent.

Somewhat unexpectedly, stocks surged once again after the Fed’s policy statement was released, presumably signaling that investors approved of the modest tapering and the stronger pledge to keep short-term rates low for an extended time.

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It’s also likely that brief but fierce down-moves in the market last week, in conjunction with similar action in November, were likely due to sell programs meant to discount the move and initiated in advance of the Fed announcement—evidence once again that large firms and investors somehow seem to know about Fed decisions in advance.

The Dow Jones industrial average rose more than 150 points minutes after the announcement, and is currently sitting at 16,058.80, up 182.80 points on the day as of 2:36 p.m. EDT. The broader-based S&P 500 is up 16.73 at 1797.9, while the tech-heavy NASDAQ is perched at 3,481.5, up 12.3.

In a policy statement released after its two-day meeting, the Fed says it will reduce its purchases of mortgage-backed securities and Treasury bonds each by $5 billion. Beginning in January, it will purchase $35 billion in mortgage bonds each month and $40 billion in Treasuries.

The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

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The Fed’s actions were approved on a 9-1 vote. The only member to object was Eric Rosengren, president of the Federal Reserve Bank of Boston. He called the move premature because unemployment remains high and inflation extremely low.

While the Fed sees inflation slowly moving toward its target, according to its most recent economic projections that were released Wednesday, its preferred inflation figures discount price moves in more volatile economic sectors such as food and fuel where consumers have been hit by large upward spikes this year, particularly in the grocery basket.

Fed officials still optimistically project economic growth of roughly 3 percent next year. They are slightly more positive unemployment, predicting it could fall as low as 6.3 percent in 2014, down from a low of 6.4 percent forecasted in September. But both projections seem to be on shaky ground, and again, unemployment figures as currently calculated are, on one level at least, geared toward being incumbent friendly as the 2014 midterm elections begin to appear on the horizon.

—AP contributed to this report

Read more of Terry’s news and reviews at Curtain Up!in the Entertain Us section of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

[In this Friday, Nov. 8, 2013, file photo, Federal Reserve Chairman Ben Bernanke speaks on a panel at the International Monetary Fund (IMF) in Washington. Members of the Federal Reserve agreed in October 2013, that they would likely start reducing their bond purchases in coming months if the job market improved further. (AP Photo/Jacquelyn Martin, File)]

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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  



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