Dammit, Bernanke! What Did You Do?

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December 18 was an exciting day for the markets. Equities edged lower pretty much from the moment the exchanges opened until about 2:00 pm, when the Federal Open Market Committee of the Federal Reserve concluded  a two-day policy meeting and announced that, after much waiting and fan fare, tapering would begin. The flow rate of purchases conducted under quantitative easing would be reduced by $10 billion to $75 billion per month.

However, far from throwing a tantrum, equity markets rallied and closed the day near record highs. Although the news took many by surprise — the January meeting was a popular bet for the announcement — investors had been preparing for a taper for months. The exact date of its arrival was far less consequential than its severity and context, and the taper was not severe and the context was appropriate.

The impact was, all things considered, pretty modest. The yield on the benchmark 10-year Treasury note jumped around a lot following the announcement and was up only about 5 basis points the following day.

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