Reducing, Trimming, Tapering

US interest rates ended day at roughly pre-FOMC levels. Equities had third best day of year for S&P 500 and reached new highs. S&P 500 rallied 2.3 standard deviations.

“FOMC reduced monthly pace of asset purchases to $75bn, trimming both Treasury and MBS purchases by $5bn – offset this with qualitative enhancement to forward guidance – slightly hawkish relative to expectations. (i) Bernanke underlined that the Committee did not intend to signal a reduced amount of overall accommodation by tapering asset purchases. (ii) Bernanke noted that under the Committee’s baseline expectation asset purchases would be completed toward the end of 2014. If growth disappoints expectations, the Committee “could skip a meeting or two,” and end purchases later, while an upside surprise could result in a more rapid pace of tapering. (iii) Additional qualitative forward guidance was provided. Specifically, “the Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” We see “well past” as potentially representing as much as one-half percentage point. (iv) The median participant’s forecasts for the funds rate (the “dots”) remained at 0.13% at end-2014, fell 25bp to 0.75% at end-2015, and fell 25bp to 1.75% at end-2016. Bernanke said that the SEP projections indicated a start to rate hikes in “late 2015,” despite the fact that 6½% unemployment is anticipated by many to be reached around the end of next year.” (Jan Hatzius, Goldman Sachs)

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