For six months, the Federal Reserve has struggled to engineer a pullback of its bond-buying program without unhinging financial markets. Yesterday, the Fed did it.
After the Fed and Chairman Ben S. Bernanke expressed enough confidence in the jobs outlook to taper the pace of asset buying and extended the timeline for zero interest rates, U.S. stocks surged to record highs and 10-year Treasury yields rose just six basis points. That’s the opposite of Bernanke’s experience in June, when global equity markets lost $3 trillion in the five days after he said he might reduce his $85 billion in monthly bond purchases this year and end it by mid-2014.
Since then, policy makers have tried to convince investors that tapering quantitative easing isn’t tightening policy. They succeeded yesterday by coupling a $10 billion reduction in monthly asset buying with a stronger commitment to keep interest rates at record lows, according to Ward McCarthy, chief financial economist at Jefferies LLC in New York.
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