Wall Street rally follows baby-sized taper

The Fed decided to reduce the size of its monthly purchases while strengthening its forward guidance, leading to big gains in US stock prices.

The Fed announced today that it would lower the magnitude of its monthly bond purchases. Starting in January, the central bank will add to its balance sheet by buying $35 billion per month of agency mortgage-backed securities (down from $40 billion) and $40 billion of Treasury securities per month (down from $45 billion).

The Fed statement also revealed that ‘if incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.’ The language of the statement made it quite clear that the course of asset purchases are not preset, though, and will continue to hinge on labour market improvements as well as inflation.

The Fed also altered its forward guidance to say that highly accommodative monetary policy would continue ‘well past the time that the unemployment rate declines below 6.5%, especially if inflation continues to run below the Committee’s 2% longer-run goal.’ In the question and answer session that followed his final press conference as Chairman of the Fed, Ben Bernanke was keen to point out that he regarded today’s decision as making no change in the overall level of accommodation and that it should not be regarded as a move toward tightening.

Into the last hour of trading on Wall Street, stock prices were flying, with the Dow achieving triple-digit gains and reclaiming the ground above 16,000. The Dow rose 1.36% or 216 points to 16,091, while the S&P 500 advanced 1.42%.

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