The Fed tapered and the markets liked it.

19th December 2013

Ian Copelin, Investment Director, my wealth, comments “Another bout of paranoia comes to nothing!

Last night the US central bank, the Federal Reserve, said it will reduce the pace of its monthly bond purchases to $75 billion from $85 billion.

The ‘will they/wont they’ debate has whipsawed equities since May, when Ben Bernanke, the chairman of the Federal Reserve, first indicated cuts to the program could start this year.

A $10 billion taper is more of a token effort – more of a test than a taper – and clearly suggests that the Fed is going to be cautious moving forward.

In addition, the Fed focused on the fact that taper is not tightening: the Fed reiterated that it will hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5%, but added that it would maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below its 2% target.

Given the market was braced for a taper and $10 billion was not a big deal, US stocks surged, sending both the Dow Jones and the S&P 500 to a record high (up 1.84% & 1.66% respectively to 16,167.97 & 1,810.65). The FTSE-100 has opened up about 65 points higher (1%) at 6,557.

This reinforces our expectations of a Goldilocks scenario (i.e. cold enough for central banks to maintain or increase their stimulus, but warm enough for global economic and company profitability growth) and in my opinion paves the way for a constructive equity environment into next year.”