Federal Reserve Taper

We’ve been hearing rumors for months that the Federal Reserve would be tapering their monthly bond buying policy, otherwise known as Quantitative Easing (QE). Well that day finally occurred yesterday as the Fed announced that they would begin pulling back on their stimulus program by scaling it from $85 billion to $75 billion. For several reasons the modest scale back comes as no surprise. First, the Fed wanted to see how markets would react to the news. Secondly, although the unemployment number has improved, it’s being helped by the lower labor participation numbers. Finally, inflation continues to be well below the 2% long-term target rate, so the Fed is in no rush to dramatically effect interest rates that would entice saving and curb spending.

In our opinion, there was unjustified fear in the markets whenever the discussion of tapering came up in the news. The fear came from a segment of the market who felt that equities were being artificially inflated by the Fed’s policy. But when you sit back and analyze the reasons the Fed would taper, it becomes clear that it is in fact positive news and we saw the markets react appropriately once the news broke. The Fed’s decision to taper was in part because the unemployment rate continues to decrease (currently at 7%) and they are optimistic the economy can improve further with less help from the government stimulus.

The big takeaway here is that it is impossible to time the market when it comes to policy decisions. The “market timer” sitting on the sideline in cash waiting for a pullback or awaiting the first news to break regarding the Fed’s decision to taper missed out on a strong uptick in the markets. The best approach continues for investors to be as disciplined as possible, to rebalance back to target allocations and stick to your long-term investment goals. The news yesterday reflects that the Fed is still willing to help with the economy the best it can while simultaneously saying that it does see improvements on the way which should all be positive developments for the equity market.