The Taper Begins; Fed To Reduce Bond Buying $10B/Month

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The U.S. Federal Reserve (Fed) just announced Wednesday afternoon that it would start to taper its aggressive bond-buying program from a combined $85 billion down to to $75 billion a month.

In a statement, the Federal Open Market Committee announced it is lowering its long-term Treasury bond purchases to $40 billion a month, which is a reduction of $5 billion, and will also reduce buying of mortgage-backed securities to just $35 billion a month, another reduction of $5 billion. This adds up to a total reduction of $10 billion a month.

Had to happen sooner or later

Most financial analysts had been expecting the Fed to make a move soon. “I think it logically, this is what they had to do,” said David Kelly, managing director at JPMorgan Funds. “If you look at what’s happened this year, the unemployment rate has come down to 7 percent. We’ve got housing starts over a million units. We got the S&P 500 (INDEXSP:.INX) up 25 percent. In this economy, you have to pull back from the most extreme monetary policy in a century. So I think it’s overdue. I’m glad to see it.”

Market reaction

Somewhat surprisingly, the markets seem to be reacting positively to the news that the long-awaited Fed taper has begun. Some market pundits have argued that the taper would mark the end of the bull run in stocks. The Dow Jones Industrial Average was up over 120 points, just topping 16,000 as of 2:16 pm EST.

Strong job growth Fed focus

U.S. job growth has finally emerged from the doldrums over the last few months, and employment growth is the indicator the Fed has been watching the most closely. The recet string of positive employment numbers was the catalyst the Fed needed to pull the trigger and begin the taper.

Yellen to replace Bernanke as Fed chair

Ben Bernanke, who saw the country through the recent financial crisis, is stepping down as Fed chairman in a little over a month. His likely successor, current Fed Vice Chair Janet Yellen, is due for confirmation in the Senate later this week. Yellen is generally known to favor easy monetary policy like Bernanke.

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