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Thursday, December 19

19th Dec - Special: After Fed's Taper

Previously on MoreLiver’s:

Redacted Version of the December 2013 FOMC StatementAleph blog

Fed cuts bond buying in first step away from historic stimulusReuters
The Fed on Wednesday embarked on the risky task of winding down the era of easy money, saying the U.S. economy was finally strong enough for it to start scaling down its massive bond-buying stimulus.

Fed Trims QE Pace to $75 Billion on Labor Market Outlook – BB
Fed Officials Lower Projection for Unemployment Rate in 2014 – BB
Yellen’s Yellow Light: The Fed Tiptoes Into a TaperBB
Also check the very good links at the bottom of the post.

The Top 10 Highlights Of "Proud" Bernanke Press ConferenceZH

Goldman FOMC Post-Mortem: "Slightly More Hawkish Then Expectations"ZH

Fed to slow buying to $75bn from JanuaryFT
The Fed took its first step away from a historic era of monetary stimulus by deciding to taper its monthly asset buying from $85bn to $75bn. The decision marks the moment when the Fed’s unprecedented bond-buying finally passed its peak almost five years after a financial crisis that shook the foundations of the global economy.

Fed Projections See No Rate Increase Until 2015WSJ
Slightly more Federal Reserve officials see the central bank waiting longer to start raising short-term rates.

Recap 12-18-13: FinallyGlobal Macro Trading

Bernanke splits the differencealphaville / FT
Today’s market reaction was positive, a (very early) sign that in this narrow sense, he might well have succeeded. Bernanke has shrunk the signaling channel through which QE works, while simultaneously he has widened that of the Fed’s guidance on short rates.

Lone Dissenter Transforms to Dove From HawkWSJ
At the final Fed meeting of 2013, the central bank’s decision to begin cutting back its bond-buying program brought a persistent hawk in from the cold, and drove one of its most consistent supporters of aggressive action into formal opposition.

Bernanke to Congress: Thanks for Not Wrecking the Economy (Any Further)WSJ
The budget deal reached this month in Congress seemed to be a comforting factor in allowing the Fed to reduce the size of its bond-purchase program.

The Fed’s Shifting Unemployment GuidepostsWSJ
The Fed attempted to bolster assurances that it will keep short-term interest rates low for a long time, by further distancing itself from the unemployment markers it had previously set for its policies. Here’s how the Fed’s thinking on unemployment guideposts has evolved.

The Market Developed a Taste for the TaperWSJ
The markets are taking the Fed’s “big” policy shift in stride; more than in stride, they are rising sharply.

Fed’s ‘Very Dovish Tapering’ Spurs RallyWSJ
Wall Street is giving the Federal Reserve wide praise for how it plans to dial back its massive bond-buying program.

Emerging-Market Currencies Finally Respond to Reason for TaperWSJ
If the Fed stays cautious and makes sure that its stimulus pullback doesn’t threaten the pace of the U.S. recovery, many emerging markets should benefit, investors and analysts say.

The Taper: Analysts ReactWSJ
As opposed to this summer’s “taper tantrum,” however, the market is rallying sharply now that the tapering is here. How’s that? To explain, we present a sampling of reactions from the Street:

Gentle Fed Taper Leaves Big Question Mark for U.S. DollarWSJ
The Fed statement poses a dilemma for currency traders. Many investors had expected the dollar to rally massively next year as the central bank begins to unwind stimulus and the U.S. economy starts to outperform its peers. But now that the Fed is sending strong indications that it will not be hiking interest rates any time soon, that could slow the dollar’s rise.

After Its Mid-Year Communications Problems, Fed Gets Message RightWSJ
The FOMC said it could keep rates unchanged near zero even after the unemployment rate–now at 7.0%–had fallen “way past” the 6.5% level. It also indicated it would be more comfortable with a pickup in inflation expectations. This was the final confirmation that “tapering is not tightening” that the market needed, and it sealed the Fed’s success in getting on top of its communications strategy.

Bernanke Goes Out Like a Wrecking BallThe Reformed Broker
The return to normalization continues. Full economic recovery is not a slam dunk nor is it a fait accompli (the Fed can’t control fiscal policy, after all). The full exit from QE / ZIRP could take years. But let’s at least acknowledge that this is an important step in the right direction.

The Beginning of the End for Quantitative EasingTim Duy’s Fed Watch
Another historic moment for a Federal Reserve that has had its share of historic moments in the past several years.  Most likely, we can now move past the issue of tapering and asset purchases.  Barring a dramatic change in the data, I doubt the Fed will reverse course.  The issue now is to what extent incoming data impact our expectations of the first rate hike.

The Fed is cutting back on its money printing -- and Wall Street is thrilledWaPo
This is a victory for Fed communications. It has taken six concerted months of effort, but the central bank has finally persuaded markets that tapering doesn't mean tightening. There may be a second dimension in play, as well, though this one is harder to prove. After months of hype and speculation around the Fed's tapering plans, investors may just like the fact that they've gotten going with it already.

Impact of Fed ‘tapering talk’ on emerging
Having criticised the Federal Reserve’s quantitative easing as a ‘currency war’, some policymakers complained when talk of ‘tapering’ the policy worsened emerging market financial conditions. Countries that had previously allowed the largest real exchange rate appreciations and current account deficit increases experienced the sharpest reversals. This suggests the importance of macroprudential policies to limit the impact of foreign capital inflows. Better fundamentals did not provide better insulation from ‘tapering talk’, nor did capital controls. Countries with larger and more liquid financial markets were more severely affected.

Guggenheim’s Minerd: There’s Still at Least $600 Billion in QE3 to ComeWSJ

QE, finitelyThe Economist
Mr Bernanke said the programme was “well on its way to meeting our economic objectives” of putting the economic recovery on a path to sustained improvement. Whether that’s true won’t be known until well after he leaves office on January 31st, but for now the market seems to agree.

What Happened The Last Time A Major Central Bank "Tapered" QE?ZH
Bank of Japan did QE from 2011 to 2006, when it started tapering. The market rejoiced at the normalization for a week or 2...before dropping 24% in the following 2 months (and 75% in 2 years)


Farewell QE, you have been a magnificent successThe Telegraph
The moral contours of QE depend on your angle of vision. But would you rather be surrounded by mass unemployment?

Fed begins tapering, Bernanke ending what he startedTradingFloor
At his final FOMC meeting, Ben Bernanke delivered on his promise to begin tapering the central bank's monthly purchases. The nature of further tapering in 2014, feedback effects and the response of other central banks are open questions.

For Asia, Fed Taper Decision Means Few Policy ChangesWSJ
Authorities have taken advantage of the long run-up to Wednesday’s tapering decision to prepare their economies and markets.

What They Said: Asian Reactions to Fed TaperingWSJ
Talk of tapering last May took Asian authorities by surprise, but this time around they're far better prepared. Here's a selection of comments from Asian policy makers and analysts on the Fed's decision to reduce its bond buying by $10 billion a month.

The Taper In Perspective (And What We Learned Today)ZH

US: a dovish taperNordea
We are not surprised by the decision, and markets also appear to be taking the announcement in stride. As the US economy finally shifts to above-trend growth in 2014 and tapering of the Fed’s asset purchases gets more underway, we believe markets are likely to start questioning the Fed’s commitment to keep rates low for a prolonged period, setting the stage for modestly higher US rates and a stronger USD vs EUR.

The Fed starts tapering and strengthens forward guidanceDanske Bank
In line with our expectations the Fed started to taper asset purchases by USD10bn split equally between treasuries and mortgage bonds.

Fed tapers, markets react modestlyHandelsbanken
Tapering decision accompanied by a change in forward guidance * Fed says it will reduce the pace of asset purchases in further measured steps at future meetings * Our view: Fed will wind down asset purchases much faster than Ben Bernanke implied

Morning Bond Update: Fed tapers, market sails on largely unfazedTradingFloor
The US Fed finally gave tapering the go-ahead yesterday although it will be with a relatively light touch starting from January. Market reaction was calm given that expectations were priced in and if anything, surprised to the upside.
FI Eye-Opener: Tapering is here - so what?Nordea
Fed’s message leads bond yields only slightly higher. Yields to correct lower before the end of the year. US equities reach new closing highs. Spanish bonds still under pressure. Fed starts a long tapering process.

The Bernanke DoctrineBB
Chairman Ben S. Bernanke said one of the central bank’s greatest strengths is its willingness, “during its finest hours,” to stand up to political pressure and make tough decisions.

The Taper Morning After: A Full Summary Of What "They" Are SayingZH


The long farewell to quantitative easingGavyn Davies / FT
Quantitative easing has demonstrated to politicians everywhere that it is possible to finance government deficits simply by printing money, a fact which had become obscure in the developed economies in previous decades. The umbilical link, previously unchallenged, between running a budget deficit and the requirement to sell bonds has been broken in the mind of the political system. Who knows what the long-term effects might be.

The Fed swaps one course of monetary drugs for anotherThe A-list / FT

The Federal Reserve Tapers: In Search of Calmer WatersMacro and Markets
Together, last week’s fiscal deal and the Federal Reserve’s taper decision appears to have marked the start of a period of relative calm where U.S. macro policy uncertainty will be far less of a driver of markets. That’s good news for the global economy.

Why Do So Many People Hate QE?View / BB
Dislike of the Fed * Wrongly Positioned: Equities * Rightly Positioned: Goldbugs * Ideology * Job Confusion * Fixed-Income Investors

Watch the risk premium! (Fed taper edition)Humble Student
If EM spreads were to start reversing themselves and start blowing out, then the contagion could potentially spread to other markets and the result would be a catastrophic market sell-off.

Bernanke Drop the Mic as He Exits the FedDaniel Gros / The Daily Beast
The charisma-free Federal Reserve chief looks a little wearier after a tumultuous term. But he’s offering his successor, Janet Yellen—and the markets—a going-away present.

The Fed Tapered Perfectly—Here's What It Needs To Do NextThe Atlantic
That best policy—what Janet Yellen calls "optimal control"—calls for above-target inflation the next few years to bring down unemployment faster… In other words, the Fed doesn't need to figure out how to keep monetary stimulus constant even as it tapers. It needs to figure out how to increase monetary stimulus even as it tapers. Or stop tapering.

Forward Non-GuidanceFrancis Coppola / Forbes
Markets will only be guided if the direction is credible. If it isn’t, they will go their own way.

Fed taper pressures emerging marketsFT
Concerns that a strong US dollar could drag on growth in 2014

Bonds Shrug As Taper Smashes Stocks To Record HighsZH
U.S. Stocks Rise to Record After Fed Plans Stimulus Cuts – BB
S&P 500 Surges to Record as Treasuries Retreat After Fed – BB
Stocks gain on Fed decision to taper, euro gains – Reuters
Dow, S&P 500 end at record highs after Fed trims stimulus – Reuters
Asia shares climb on Fed commitment, dollar jumps – Reuters

Emerging markets take taper in their stride – FT

India: taper fears fade for now – beyondbrics / FT

EM vs QE: 5 reasons for the collective markets taper shrug – beyondbrics / FT

Europe Likes the Taper Message Too – WSJ
European Stocks Rise as Fed Taper Signals U.S. Recovery – BB
European Stocks Rise After Fed as Asian Currencies Drop – BB
European shares rally as Fed sugar-coats taper move – Reuters