Federal Reserve: Change of Plans doesn’t Mean Stock Market Grows

The Federal Reserve cited stronger jobs growth as a reason for its call to start to reverse its bond-buying program. They forecasts unemployment of 6.3 percent in 2014, up from its previous forecast of 6.4 percent. The Federal Reserve tempered nervous investors by suggesting its key federal funds rate would keep less than previously expected. It depends on whether the Federal Reserve’s unemployment rate target is hit. The Federal Reserve has kept interest rates close to zero since late 2008 and has signaled it won’t raise its federal funds rate until unemployment hits, at the least, 6.5 percent.

In a surprise move, the Federal Reserve decided the U.S. economy was doing well enough that it might begin to cut back on its generous $85.0-billion a month quantitative easing (QE) strategy.

It is a “surprise” because the Federal Reserve at the start said it would not think about tapering until the U.S. economy was on solid, sustainable economic ground that meant an unemployment rate of 6.5% and inflation of 2.5%. Today, unemployment sits at seven percent and inflation is close to historic lows at below one percent.

Stock Market Grows

Against a weak economic backdrop, the Federal Reserve created a brave and daring call to slash its monthly QE policy by a paltry $10.0 billion. Which means that rather than pumping $1.0 trillion into the U.S. economy next year, it is solely going to inject $900 billion? In other words, the U.S. national debt goes to increase by $900 billion. (Source: press release, Board of Governors of the Federal Reserve System web site, December 18, 2013.)

If the U.S. economy were on solid footing, Fed Chairperson Ben Bernanke would have created a much bigger dent in his monthly bond-buying program. Instead, he created a token gesture, as he gets able to hand over the baton to Janet Yellen early next year.

After injecting $4.0 trillion into the U.S. economy, the country is no (or no) more happy than it had been before the Fed started quantitative easing. U.S. unemployment is down from its Recession high of 100 percent in October 2009; however, it has yet to interrupt the seven-percent level. Meanwhile, the underemployment rate has hovered around 14 July since 2009.

Interestingly, the Federal Reserve cited stronger jobs growth as a reason for its call to start to reverse its bond-buying program. Going forward, the Federal Reserve said that U.S. jobs numbers could improve quicker than expected—though solely slightly. The Fed forecasts unemployment of 6.3% in 2014, up from its previous forecast of 6.4%. (Source: “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2013,” Board of Governors of the Federal Reserve System web site, December 18, 2013.)

That said, the Fed’s largely symbolic tapering is the end for quantitative easing. However, it is not like there won’t be a plenty of cheap money to be had. The Federal Reserve tempered nervous investors by suggesting its key federal funds rate would keep less than previously expected.

But, for how long? It depends on whether the Federal Reserve’s unemployment rate target is hit. For now, Ben Bernanke said the Fed can keep the federal funds rate at 0.25% until unemployment gets down to 6.5% or “beyond”—which might mean even lower.

What does that mean for investors? It implies that investors should continue investing the way they have been.

Why?

The Federal Reserve has kept interest rates close to zero since late 2008 and has signaled it won’t raise its federal funds rate until unemployment hits, at the least, 6.5 percent. A mark that, according to the Fed’s own projections, will not be reached until late 2014 at the earliest, probably even into mid-2015.

That means much cheap money is going to be fueling the stock market for a minimum of another year or so. In addition, that points to a different year of record-highs for the S&P 500 and Dow-Jones Industrial Average.