Now and Then: Fed Policy Changes Turn Markets on Their Head
The U.S. Federal Reserve surprised markets on Wednesday by announcing that it was not tapering asset purchases, and would continue buying agency mortgage-backed securities and longer-term securities at a rate of $85 billion per month. The news undermined months of speculation and a consensus among economists and investors that the Fed would announce some degree of tapering, and tripped up Mr. Market’s bad-news-bears attitude on Wednesday.
For some context, Mr. Market has grown so accustom to accommodative monetary policy that even the specter of its withdrawal has sent shock waves through various asset classes around the world. Investors have grown used to all the side effects of quantitative easing: higher equity valuations, lower interest rates, higher inflation expectations, and a weaker dollar.
A change in the rate of asset purchases would mean a change in market conditions, and with its usual, awkward prescience, the markets priced in the anticipated policy shift over the past few months.