On December 18th, following the final FED Open Market Committee meeting of the year, Ben Bernanke announced that the FED will finally begin ‘tapering’ its asset purchase program. Under the title of Quantitative Easing (QE), the FED had been purchasing $85 billion of treasury bonds and mortgage backed securities each month. However, after multiple indications that the US economy is hastening its recovery, the FED has decided to reduce that purchase by $10 billion to $75 billion per month.
Because this decision wasn’t unexpected and because it was only a modest reduction in asset purchases, stocks responded positively to the announcement. The Dow Jones Industrial Index rallied by 293 points to an all time high of 16,167.97.
As long as unemployment and GDP numbers keep improving, the FED is expected to keep gradually reducing its asset purchases in order to continue shrinking its balance sheet. Nevertheless, Bernanke states that the FED will still keep interest rates at near zero levels as long as unemployment exceeds 6.5%, which should be till sometime in late 2014 or early 2015.
On a final note, this was Ben Bernanke’s last FOMC meeting and press conference as FED Chairman. Janet Yellen will be taking over from Bernanke on January 31st of 2014. When asked about how he views his performance over the last 8 years, Bernanke said, “I hope I live long enough to read the textbooks.”
“Monetary policy cannot do much about long-run growth, all we can try to do is to try to smooth out periods where the economy is depressed because of lack of demand.”