Federal Reserve to scale back stimulus by $10 billion

[DonViejo]

Source: Washington Post

The Federal Reserve announced Wednesday that it will scale back its multibillion-dollar stimulus program, a sign of its growing confidence in the nation’s economic recovery.

For more than a year, the central bank has been buying $85 billion in bonds every month in hopes of pushing down long-term interest rates and boosting demand among consumers and businesses. Starting in January, it will reduce that amount by $10 billion -- a small but symbolic first step toward unwinding its unprecedented support of the economy.

Read more: http://www.washingtonpost.com/business/economy/fed-to-scale-back-stimulus-by-10-billion/2013/12/18/54dc2ee4-6747-11e3-8b5b-a77187b716a3_story.html

[RC]

1. Recovery? Tell that to the people working 3 and 4 jobs.

Put that money on main street, instead of Wall Street, if you actually want Recovery.

[maxsolomon]

2. How will Wall Street get by without all that free money?

85 billion PER MONTH. Can't help feeling that the Stock Market ride since the Bush 2 collapse is all a big bubble.

[DallasNE]

3. Not Really

While the market generally over reacts to events -- in both directions -- the common denominator for stock prices is earnings, with an element of speculation. Also, nobody ever asks about who benefits from this $85 billion a month. Bond traders, even more that stock traders, are concentrated in the top 1% and countries like China. That money will have to go somewhere and that somewhere is likely the stock market so this move should be bullish for the stock market. Think not, what has the reaction been on the stock market today.

[elleng]

4. Right. Thanks.

Markets »
S.&P. 500
1,809.99
+28.99
+1.63%Dow
16,154.03
+278.77
+1.76%Nasdaq
4,070.12
+46.44
+1.15%

[Morganfleeman]

8. GENERALLY earnings is the catalyst

But in reality, plot the size of the Fed balance sheet against the S&P 500 in the last few years and you'd be a hard pressed to find a better correlation. Earnings growth does not provide the same nearly perfect correlation. The question is whether this manufactured stock boom will lead to better earnings. Earnings are improving but are they improving to a sufficient degree to justify the PE multiple expansion we've seen over the last couple of years? Personally don't think so but the market is not necessarily rational, especially when the primary driver of the market is hot money flows from the bond market where yields are minuscule.

[Igel]

5. Most of the QE has gone for two things.

The first is Treasury Bills, helping to keep demand high. If demand slips, then the interest rate has to increase to entice more buyers.

The result of that is lower interest rates on federal debt.I.e., making borrowed money cheap. And reducing the interest paid on the national debt.


A slightly larger amount--possibly because this buying program started a bit earlier--has been for mortgage backed securities. This helps to keep mortage interest rates low, keep lots of money in the mortgage pipeline, and encourage having house sales increase, housing prices stabilize and even increase. This also almost certainly helped Fannie Mae and Freddie Mac turn a larger than expected profit.


These are three big successes that the Obama administration and many DUers really like. They're Bernanke's work, sad to say.

Early on there were substantial stock purchases, although I doubt they were made randomly. Other kinds of bonds were also bought, esp. junk mortgage bonds.

[Alhena]

6. It makes it really hard for savers, though

my parents' retirement plan was based on living off the interest from their savings.

Largely because of the Fed's actions, they get next to nothing from interest.

[Marblehead]

7. if we printed

our own money we wouldn't need a QE