The financial world was shocked yesterday afternoon when the Federal Reserve Open Market Committee did not follow through with the heavily-hinted at, and much expected tapering of its $40 billion a month purchases of mortgage-backed securities and $45 billion in Treasuries.
Market indexes from equities to precious metals looked like drawings of a fireworks display (except for the dollar.) The Dow Jones and S&P 500 indexes hit new all-time highs. the Nikkei hit an 8-week high, and the Hang Seng rose to a yearly 8-month high. European stocks also hit multi-year highs on the news.
Bonds across the world also surged, with the 10-year Treasury yield dropping to 2.70%, and the German bund saw its biggest one-day drop in yields in over a year. Japanese government bond yields hit 4-month lows as well.
This is all a life-saver for emerging market economies such as Indonesia, India, Turkey, and Brazil. Their economies and currencies had hit crisis levels as foreign investment fled back to the U.S. and Europe in anticipation of higher yields at home due to Fed tapering. Some of that money is already flowing back, as the higher yields in developed markets fail to materialize.
Gold saw its largest one-day gain since June 1, 2012, rising 4.2%. Silver saw its biggest one-day gain since November 2008, jumping a whopping 6.5%
So, why didn’t the Fed taper? The markets had had plenty of time to get ready, and in fact were already mostly in post-taper positions. The Fed’s explanation is that they saw the hike in interest rates ahead of the taper as damaging a housing recovery that they are pinning their hopes of a broader recovery on, and decided that the economy still cannot survive without being propped up.
Today’s Wall St Journal quotes a high level analyst as saying the Fed is “running scared” over tapering now:
Eric Green, global head of rates, FX and commodity research at TD Securities, says the Fed’s latest announcement shows the central bank is “running scared”
“This FOMC edition feels less dovish than it does outright scared,” Mr. Green says. “Confidence in the outlook has dimmed. That Bernanke had a free pass to begin that tapering process and chose not to follow is telling. The Fed had the market precisely where it needed to be. The delay today has the effect of raising the benchmark to tapering and ultimately makes that first step harder to achieve.”
Gold has been holding steady around the $1,365 level since yesterday afternoon, so I guess we can surmise that the price of the taper was $55 on the spot price. Many analysts had opined that precious metals had “priced in” a taper more than stocks or bonds.