December 18 turned out to be T-Day: the day on which the Federal Reserve finally tapered QE3. In making the move, the Fed acknowledged an improving economy; Wall Street quickly and enthusiastically applauded its decision.<\/p>\n
The Fed will reduce its monthly asset purchases by $10 billion. <\/strong>QE3 will continue, but the central bank will buy only $75 billion of bonds per month starting in January. The $10 billion cut comes evenly across Treasuries and mortgage-backed securities; next month, the central bank will purchase $40 billion of the former and $35 billion of the latter.<\/p>\n Fed officials voted 9-1 in favor of a taper. <\/strong>Boston Fed President Eric Rosengren was the lone dissenter on the Federal Open Market Committee, terming the action \u201cpremature\u201d as the jobless rate had not yet descended to the Fed\u2019s target of 6.5%.<\/p>\n Market reaction: thumbs up.<\/strong> The 2:00pm EST announcement gave stocks a real boost; the Dow rose 292.71 for the day to 16,167.97, the NASDAQ gained 46.38 to 4,070.06 and the S&P 500 ascended 29.65 to 1,810.65. Judging by the rally, Wall Street seemed to agree that it was time for action.<\/p>\n “I think logically, this is what they had to do,” JPMorgan Funds managing director David Kelly told CNBC, reflecting a broad opinion. “If you look at what’s happened this year, the unemployment rate has come down to 7 percent. We’ve got housing starts over a million units. We got the S&P 500 up 25 percent. In this economy, you have to pull back from the most extreme monetary policy in a century. So I think it’s overdue. I’m glad to see it.”<\/p>\n Additional gradual reductions in QE3 may follow.<\/strong> At Wednesday\u2019s press conference, Fed chairman Ben Bernanke noted that the central bank\u2019s quantitative easing effort may be reduced in \u201cfurther measured steps\u201d determined in upcoming FOMC meetings.<\/p>\n Could an interest rate decision be coming? <\/strong>The FOMC addressed that topic in its policy statement. It noted its intention to keep the federal funds rate at current levels \u201cwell past the time\u201d unemployment reaches its target of 6.5%.<\/p>\n What does this mean on Main Street?<\/strong> As the noted economist Peter Morici told MarketWatch: \u201cThe stimulus program was supposed to boost spending going in, so it\u2019s going to reduce spending going out.\u201d<\/p>\n It may become slightly tougher to finance big-ticket purchases in 2014, especially if the Fed keeps reducing the scale of its monthly asset purchases as the year unfolds. National Association of Realtors chief economist Lawrence Yun commented to MarketWatch that homeowners who want to move (or move up) \u201cneed to realize that it could be more challenging a year from now.\u201d Yun thinks the average interest rate on a 30-year home loan could hit 5% or even 5.5% sometime in 2014. Home improvement projects, student loans and auto loans may all grow costlier.<\/p>\n Retirees, on the other hand, may see some financial positives if the Fed opts to tinker with interest rates next year. \u201cInterest rates close to zero punish savers and retired folks,\u201d University of Michigan-Flint finance professor Mark Perry reminded MarketWatch. \u201cRight now, consumers are getting almost zero interest on their checking or savings account.\u201d Perry estimates that under present conditions, American savers could realize $76 billion in additional interest income for every 1% that the Fed raises the key interest rate. Retirees and pre-retirees who dream of traveling more might also benefit in the near term \u2013 the dollar strengthened versus a basket of currencies prior to the central bank\u2019s announcement, and an appreciating dollar certainly buys more overseas. <\/p>\n","protected":false},"excerpt":{"rendered":" December 18 turned out to be T-Day: the day on which the Federal Reserve finally tapered QE3. In making the move, the Fed acknowledged an improving economy; Wall Street quickly and enthusiastically applauded its decision. 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