No tapering, no tapering-lite: Federal Reserve confounds markets by maintaining full bond buying programme

18th September 2013

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Tapering didn’t happen – not even tapering lite from the Federal Reserve. And so it is as you were on  bond buying. The S&P 500 and Dow Jones broke records on the news though some market participants have questioned whether this is a logical reaction given the Fed’s assessment of the fragility of the US recovery.

The Federal Reserve defied the predictions of just about everyone and will continue its $85bn worth of monthly purchases of bonds. Those who trade hour by hour and even second by second were certainly caught on the ‘wrong side of the trade’.

It is likely to cheer emerging markets which were already expected to benefit, if QE had been tapered only slightly.

Pundits will be dusting down their metaphors about addicts promising to stop but falling at the first hurdle or those of a more religious bent may suggest the Fed is effectively saying ‘Lord make me chaste but not yet’ in an echo of Saint Augustine.

But neither really helps explain the Fed’s thinking. Put simply real interest rates had drifted higher, which meant the economy was behaving as if things had been tightening. It has certainly slowed the US housing market.

Indeed, back in August, Mindful Money reported Blackrock’s Russ Koesterich’s concerns about what rising mortgage rates could do to the recovery, though he was among the many who expected some degree of tapering in the last few days.

Bernanke also highlighted his concerns about a possible government shut down.

The Washington Post’s wonk blog warmed to the theme, with Bernanke concerned about Congress renewed rows about the debt ceiling and fears the polarised situation.

Some Republicans want to restrict or abolish Obama-care in return for concessions. That certainly looks like an impasse in the making.

Bernanke also defended his decision to trail the possibility of easing saying central banks have to be open. In the next few days, critics may not agree.

At the Fed itself he still has one critic and it is worth noting her concerns.

Esther George, president of the Federal Reserve Bank of Kansas City, dissented for the sixth time this year repeating her concerns that the bond purchases could fuel the risk of inflation and financial instability. Outside the FOMC that is a more commonly held view.

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