The Federal Reserve surprised Wall Street last week and backed off their plans to taper back their asset purchasing in their Quantitative Easing Program.
Asset purchases —quantitative easing — is when the Federal Reserve creates money out of thin air and buys both U.S. debt (Treasuries) and mortgage securities (those toxic mortgages we all know and love).
Wall Street was expecting a reduction in these purchases which is currently $85 billion a month and was rumored to be reduced to about $70 billion a month, an 18 percent or so reduction.
Analysts (this one included) found this move odd to say the least. The market had digested this cutback of purchases and was prepared for it. The Dow had already thrown its fit a few months back when Ben Bernanke (Federal Reserve Chief) announced the taper and things had stabilized. Since a plunging market was one of the main fears from a cutback, the fact that the market had absorbed what was coming was good news.
With the back pedal, the markets of course soared, at least for one day, but they now appear edgy again. It’s as if the taper was an expected course of recovery but now the markets don’t know what to think.
Investors now are left to wonder why did the Fed think it couldn’t slow down the money spigot? Is the economy weaker than what we’ve been told? Is the recovery they claim not taking shape as expected?
The fear now is how much credibility did the Fed lose in this 11th hour about face?
Wall Street seemed a bit burned by this unexpected move as the big money players expect and usually get clear signals in advance as to the Federal Reserve’s major market moving decisions so they can position themselves accordingly. This time around however everyone was taken by surprise including Wall Street, violating an age-old central bank policy: Never surprise the markets.
What we are left with is the fear of just when will the next taper shoe drop? Investors now wait with their finger on the trigger knowing what happened the last time tapering was announced; the markets plunged. Now it’s “here we go again” waiting for Godot.
When, and if, the next taper is announced, investors may rush for the exits in even greater numbers, remembering the reaction the first time tapering was announced. Then the next question will be will they really taper?
The confusion on Wall Street as it relates to the Fed is now greater than ever. The Federal Reserve may have missed an opportunity to start down the road to recovery by their change of heart canceling the taper last week. Even more importantly, how much damage have they done in the long run on the trust issue as it pertains to what they say they will do and what they do?
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM Thursdays at noon and is syndicated on more than 30 radio stations throughout the U.S. His website is www.moneymanagementradio.com.