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Fed Announces Plans To Taper Bond-Buying Program

(12/19/2013)

Signaling confidence in the continued recovery of the U.S. economy, the Federal Reserve announced it will begin paring the bond-buying program – nicknamed QE3 – that it has used to stimulate growth. The decision is, by far, the most significant policy move by the Fed in 2013. After implying a coming taper this past summer, the Fed will reduce its bond purchases from $85 billion per month to $75 billion per month starting in January. More reduction will likely be planned for the future, though Fed Chairman Ben Bernanke left the door open to skip decreases if the economy does not accordingly fare well.

“We’re still going to buy assets at a high rate,” Bernanke said yesterday of the bond purchases, which now appear slated to end in 2014. “We're providing a great deal of accommodation to the economy.”

The stock market and investors responded favorably yesterday to the announcement. Industry reaction was similarly enthusiastic. “Although the recovery is very modest, it is significant that the Fed chose to begin tapering bond purchases,” says Marc Simon, CEO of Top 40 distributor HALO Branded Solutions (asi/356000). “The Fed's exhibited confidence is likely to instill more confidence in businesses, consumers and investors and holds the hope of speeding the pace of the economy’s slow recovery to date.”

The Fed also announced it would keep long-term interest rates at or near zero for the foreseeable future. While previously the central bank had promised not to raise rates until the unemployment rate dropped below 6.5% (which is not expected until late next year), the Fed went a step further and vowed to hold down rates well after that benchmark is reached.

One reason the Fed remains cautious about tapering too much, too quickly is because of the lack of price increases. Bernanke again expressed concern about the country’s low inflation rate, which has stayed for months below the 2% marker the Fed has charted for successful economic growth. Analysts largely agree that some inflation is helpful for economic gains.

While overall reaction to the Fed decision was encouraging for markets, industry firms are still taking a pragmatic approach. “The best thing for our business is to have as much long-term visibility as possible regarding interest rates, which are obviously being impacted by the Fed decisions,” says Dave Thompson, CEO of Top 40 firm National Pen (asi/281040). “While the recent news triggered a positive reaction from the market, which is great, it is really not going to impact our plans one way or another. We are making decisions with a timeframe of one to three years versus month to month.”



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