Fed tapers, market reacts

The E-mini S&P 500 initially sold off then quickly rallied off of the Federal Reserve’s Open Market Committee’s (FOMC) decision to reduce its monthly bond purchase program (QE3) by $10 billion (see chart).

It may seem counterintuitive for the S&Ps to rally on the news of a taper—that was not the prevailing view of market experts— after the huge selloffs earlier this year on the statement by Fed Chair Ben Bernanke that a tapering might occur by the end of the year but some analysts believe that it will add needed certainty to the market.

Tapering is not tightening

Miller Tabak's Andrew Wilkinson wrote, "Reinforcing its stronger forward guidance the Fed also noted that it likely will be appropriate to maintain the current target range for the fed funds rate (0.0% – 0.25%) well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee’s 2% longer-run goal. "

“They are not shutting off the taper,” says Martin McGuire, managing director at TJM Institutional Services. He notes that the market will no longer have to guess what the Fed is up to. “The Fed has given a path to future tapers; the market loves paths. There is less guesswork now. There is certainty [coming from] an area of uncertainty.”

McGuire adds, “We haven’t had that for a longtime.”


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