There are a couple of things going on here. First, a changing of the guard: Janet Yellen is set to succeed Ben Bernanke as chair of the Federal Reserve. Next, an improving economy: employment numbers have been surprisingly good as of late, pushing unemployment down to 7% recently. Lastly, lots of unease and lack of clarity: investors have been skittishly anticipating the end of the monetary stimulus provided by the Federal Reserve.
All of these things came together yesterday in possibly the most exciting monetary policy story since quantitative easing started.
Quantitative easing (QE), round infinity, the latest of the Federal Reserve's monetary stimulus, consisted of $85 Billion of purchases of long term bonds and mortgages. This held long term interest rates down, ostensibly to encourage long term investment. A possibly unintended side effect was to assure anyone holding or buying bonds that their prices would keep going up for a little while. The investor uncertainty around QE has been the speculation over when and how it would end, or taper off.
More information came to market yesterday when the Fed announced that they would start to reduce purchases to $75 Billion a month next month. This is not a huge reduction, but the timing is a great relief for a few reasons. Firstly, this frees Janet Yellen of the pressure of continuing the full scale purchases. With so much institutional momentum behind QE, it is a relief that the brakes are already being applied, if only tapped lightly. Second, since the tapering of QE was supposed to be based on the health of the economy, this is a good omen - the Fed believes that the economic trends will support the withdrawal of stimulus. Lastly, investors now have an extra crumb of information when analysing investments. The question of when reductions would happen is off the table, we get to speculate on everything else now!
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