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Stocks soar despite Fed move to start QE 'taper'

12:16 PM, Dec 18, 2013   |    comments
New York Stock Exchange
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NEW YORK - U.S. stocks soared even though the Federal Reserve announced that it would begin dialing back on its market-friendly bond-buying program in January, a decision that marks the start of a long-awaited shift back to more normalized monetary policy.

The Dow Jones industrial average surged more than 200 points after the Fed decision, as markets were soothed by the Fed's dovish comments overall, which suggests a still-easy Fed going forward.

The Standard & Poor's 500 index jumped 19 points to 1,800 and the Nasdaq composite index added 18 points to 4,042.

The Fed said it would reduce its current $85 billion in monthly purchases of Treasury bonds and mortgage-backed bonds slowly, trimming its purchases by a total of $10 billion per month. They said they would trim purchases of Treasuries by $5 billion per month, and mortgage-backed bonds by $5 billion, too.

More important, the Fed said it would keep short-rates low "well after" the unemployment rate, now 7%, hit 6.5%, which was a change in guidance that points to longer policy accommodation from the Fed.

TAPER BEGINS: Fed will cut bond purchases by $10B in January

FIRST TAKE: Fed action shows economy's strength

The Fed's move was dubbed "Taper Lite," by Thomas Tzitzouris, an analyst at Strategas Research Partners.

There was some logic to why stocks rose, despite the Fed's first steps toward reducing stimulus, says David Kotok, chief investment officer at Cumberland Advisors.

"The taper announcement lowers uncertainty," says Kotok. "We now know they will be gradual. They will not shock the economy. They will be slow to tighten, as tightening is 2 years or more away. They see inflation as too low. Lots of air got cleared now that they have announced it."

In a statement, in explaining its decision, the Fed said it "sees improvement in economic activity and labor market conditions" that are consistent with growing underlying strength in the broader economy." It also said it would continue to monitor incoming economic data and continue its asset purchases "until the outlook for the labor market has improved substantially."

FED STATEMENT: Read the text of the FOMC statement

The Fed also stressed that it would continue to reduce asset purchases in "measured steps" if the job market continues to heal and inflation starts to move closer to 2%. Tapering, the Fed stressed, is not on a "preset course."

In explaining the market's positive response to what was viewed as a market negative, Paul Hickey, co-founder of Bespoke Investment Group said: "The market has been cognizant of the fact that this was going to happen at some point in the near future, so now that it has happened it is one less thing to worry about. Additionally, the rest of the statement was dovish as they said that the current rate environment would remain in place even after the unemployment rate dropped below 6.5%."

In the prior session, the Dow declined 0.1% to 15,875.26. The Nasdaq composite edged lower 0.1% to 4,023. 68. The S&P 500 dipped 0.3% to 1,781.

TUESDAY: Stocks drop slightly as Fed reviews 'easy money'

European markets were higher as Germany's DAX index gained 1.1% to 9,181.75. France's CAC 40 jumped 1% to 4,109.51 and Britain's FTSE 100 index rose 0.1% to 6,492.08.

Asian stock markets were mostly higher. Japan's Nikkei 225 index rose 2% to 15,587.80. Hong Kong's Hang Seng index climbed 0.3% at 23,143.99. The major European benchmarks advanced.

In energy markets, benchmark crude for January delivery gained 23 cents to $97.44 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped 26 cents, or 0.3% to $97.22 a barrel on Tuesday.

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