Equity indexes enjoyed one of their best runs since the March 2009 bottom, but that strength is largely attributable to various quantitative easing programs from the Federal Reserve. Now equities must stand on their own.
The Federal Open Market Committee last week reduced monthly bond buying by $10 billion for the second straight meeting, cutting purchases to $65 billion following gains in the job market and signs of stronger spending by businesses and households.
Even after five years of the Fed’s most aggressive accommodative policy in history, there is still a lack of hoped for quality credit creation in the economy, which could be a sign that the greatest deleveraging of the U.S. economy since the Great Depression is still not complete. The Fed’s unrelenting dovish policy appears to support this concern.
The U.S. Federal Reserve decided to withdraw $10 billion from its monthly purchases in spite of the global concerns and the slowdown in emerging markets and that concerned investors are now left “wondering” what the next “shoe to drop” will be.
In December the Federal Reserve saw enough evidence of economic strength to begin tapering its Quantitative Easing (QE3) program and markets are adjusting to this new reality. So far it has been a tough pill to swallow with emerging markets being the first to feel the pains of withdrawal.
Provided the economy performs as well as Federal Reserve policymakers expect, the Fed will phase out large-scale asset purchases within the next 10 months. That’s a big “if” of course. The Fed has been projecting a stronger recovery each of the last four years, only to see growth average around a tepid 2%.