Markets soar after Fed says it will begin to 'taper' stimulus
Markets take Ben Bernanke's announcement in their stride thanks to 'doveish' news on interest rates
IT WAS the announcement widely expected to send stock markets into a nosedive. Instead, Wall Street and European markets soared to "new highs" after the Federal Reserve said it was taking the first steps towards winding back its long-running stimulus programme.
Ben Bernanke, the chairman of the Federal Reserve, announced yesterday that the central bank would shrink its monthly asset-buying programme from $85bn to $75bn. In his final public appearance before handing over to his successor, Janet Yellen, he said the "tapering" would begin next month and the programme was likely to be wound down before the end of next year.
Previous suggestions that the Fed was about to scale down its so-called "quantitative easing" had "caused turbulence in emerging markets", the Financial Times reports. But markets took Bernanke's official confirmation that the Fed was planning to scale back the supply of cheap money in their stride, the paper says.
The Dow Jones industrial average rose by nearly 300 points to a record close of 16,168 and the S&P closed 29.65 points higher at a new high of 1,810.65.
The "relative calm" on global markets suggests that "half a year of teasers from the US central bank had prepared the ground well, the FT writes.
The Washington Post describes market reaction to Bernanke's announcement as "ecstatic". The reason for the ebullience, the paper says, is that the tapering of the stimulus programme is a "sign of confidence that the economy is starting to stand on its own two feet".
Fuelling that confidence is data revealing that the US economy added 203,000 jobs in November and unemployment has fallen to seven per cent – the lowest in five years. The positive numbers continue "several months of solid gains and raise hopes that the recovery is ready for takeoff", the Post says.
The other reason markets responded favourably to Bernanke's news is that the "hawkish" announcement of tapering was tempered by a "doveish" pronouncement on interest rates, the New Yorker explains.
It adds: "The Fed changed its forward guidance about interest-rate policy, stating that it would most likely keep interest rates at their current record-low levels even after the unemployment rate falls below 6.5 per cent — a figure it had previously identified as a possible threshold for rate hikes."
The Times says the Fed's decision to begin the long-awaited taper next month means that Bernanke has "met his original plan to start winding up the stimulus programme before 2014". The central bank was originally expected to begin tapering in September but delayed the decision on the back of weak data and concerns about the global economy. ·