From the July/August 2013 issue of Futures Magazine • Subscribe!

Fed plants seeds for rational stock and bond markets

U.S. equity and fixed income markets had what best can be described as a temper tantrum in May and again in June after the Federal Open Markets Committee (FOMC) intimated that the Fed may before the year is over reduce the amount of direct bond purchases it makes each month as part of  the third round of quantitative easing (QE3). 

Both fixed income and equity markets dropped dramatically, which appeared to be an overreaction as there was no commitment, as some had suspected, to “taper” QE3 this summer. In fact it was only in Fed Chairman Ben Bernanke’s press conference that he indicated the Fed would begin to reduce bond purchases before the end of the year and pare them down to zero by mid-2014, all with the qualification of economic numbers permitting. 

The Fed’s statement didn’t seem so extraordinary given the slow but steady growth in the economy, but the markets have grown accustomed to their $85 billion fix each month and reacted violently to the thought it would be taken away. 

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