What the Fed?

Our current monetary policy is not a topic that effects just investors. The Feds decisions effect EVERYONE and is something everyone should be familiar with.

The whole Quantitative Easing (QE) concept can be a hard pill to swallow especially if you’ve never heard of it before. The market is really sensitive to the Federal Reserve (The Fed) because their decisions are effecting investors forward guidance (views of the future)

QE  in 30 seconds:

• Fed buys bonds and mortgage backed securities. The asset purchases cause lower interest rates, which encourages spending in the economy. Spending incentivize banks to lend, which increases financing activities for consumers and businesses.
• The Fed was buying 85 billion dollars worth of assets each month and planned to continue until they felt the economy was somewhat stable. (lower unemployment, healthy market performance and growth)
• QE= Fed training wheels for the American economy

Basically everyone is wondering when they are going to take off the training wheels, just like riding a bike if you are not ready to ride the two wheeler you could be in for a very rude awakening.

Instead of cutting the bond buying off cold turkey, The Fed is taking a screw out of one of the training wheels. Each month they are planning to reduce the amount of bond purchases by 10 billion per month, ending the monetary policy in 2014.  The move to decrease bond buying indicates that the economy is  getting closer to meet their standards.

The recent declines in U.S indices is due to the spillover from the selloff in Emerging Markets.

• A selloff in emerging markets was caused by the central banks decision to tighten their monetary policy. Tightening means the Central Banks plan to increase interest rates, which would usually create an incentive for investors. The aggressive rate of tightening is concerning because it may hinder their economic growth, which is causing a selloff.
• Detailed article about the EM Selloff: Emerging Markets Selloff Spreads from WSj

The market was pretty tepid going into the meeting. The Fed announced they will continue reducing the asset purchases. The downward momentum added to the index decline from EM. Despite yesterday's rally, I am maintaining a bearish view.

Here are some articles if you want some additional information about the Fed meeting:
Fed stays the course by tapering another $10 billion from MarketWatch
US stock indexes steeply lower after Fed does as expected from CNBC

Thanks,

Brit