Fed’s Taper Off: Doves Prevail, Markets React

No tapering for now. Not even the $10-15-billion-dollar-trimming that investors and analysts expected.
“Conditions in the job market today still are far from what all of us would like to see,” Bernanke said (unemployment rate has dropped from 8.1% when the stimulus program began a year ago to 7.3% last month).

His words had an immediate effect worldwide.

*On the (happy) Street:
In just five minutes, the S&P 500 soared to a new record high, gold surged $30, oil shot up $2.

“We suspect that the bias on the committee remains against a long-lasting QE program. Barring a really bad outcome from the upcoming battles over fiscal policy in the fall and winter, we expect the Fed to taper at the December meeting,” IHS Global Insights wrote in a note to its clients after the announcement.

“What I’m worried about now is the Fed is going to be buying maybe more than 100 percent, maybe 110, 120 percent of all debt issuance. I think that’s going to create more of a bubble issue in the future and it’s going to make it more difficult to unravel this,” said Larry Fink, CEO of BlackRock.

“This has been a handoff from the Bernanke Fed to the Yellen Fed—a Yellen Fed that is dovish with a capital D that tapers less fast, more slowly, that ultimately provides forward guidance and that keeps the policy rate at 25 basis points for a long, long time and that’s why you want the front-end as opposed to the long Treasurys in a marketplace. That’s why we’ve done real well today,” stated Pimco’s Bill Gross.

“Given that the financial markets had priced in the beginning of a QE taper today, policymakers had a free option to proceed without a major shock to the markets. Given that they did not take this option, the likelihood of an October taper is reduced—and so at this juncture, the first move now appears to be in December, which is when we will get another round of updated forecasts and another press conference,” Deutsche Bank said.

“Delay is good policy,” writes Ian Shepherdson of Pantheon Macroeconomics. “We applaud this decision on economic grounds; the improvement in the labor market evident in the unemployment rate is nothing like as marked in the employment data. And with Congress likely to be fighting over the budget/debt ceiling for the next couple of months, potentially depressing business and consumer confidence, the Fed’s inaction will offer a bit more support to the economy over what could be a very difficult” fourth quarter, he said.

*On emerging markets:
EM were the biggest winners. Currencies like the Brazilian real or the Mexican peso -which suffered their worst time in two years during this summer’s sell-off- jumped to the highest levels in months.

“This is a major signal because it does eliminate the risk of a quick Fed-driven correction in EM. Essentially, this is a green light signal for risky assets to rally further, and probably in a big way…,” Benoit Anne, global head of emerging-market strategy at Société Générale told the Financial Times.

“It gives everyone some breathing time. It certainly takes some of the immediate pressure off the more vulnerable countries,” Denise Simon, an emerging-market fixed income manager at Lazard Asset Management, told Bloomberg.