The FOMC decision to taper QE was the big news from an economic perspective, but beyond that, there were a few other notable takeaways that are important in light of the new trajectory of Fed policy.
Specifically, we learned last week that the economy in Q3 was stronger than we thought, that the manufacturing sector in December is a little slower than we thought and that the housing recovery is still ongoing, but concerns about a loss of momentum in the face of rising rates remain.
Starting first with the Fed, though, you all know by now the Fed announced it would “taper” its QE program by $10 billion a month (from $85 billion to $75 billion) starting in January. In a feat of monetary policy wizardry, though, the FOMC managed to taper QE yet come off somewhat “dovish.” They strengthened their “forward guidance” for keeping interest rates at 0%, saying the would keep rates at 0% well past 6.5% in the unemployment rate (thereby effectively raising the bar for when rates would start to rise). Overall the market welcomed the news, and stocks saw a big post-FOMC rally Wednesday afternoon. And bonds, while they did decline, largely “behaved.” It was the best-possible outcome for the Fed and for stocks.