US economic data were too great to be ignored – AXA’s Harlow

Importantly the tapering announcement included a pledge to maintain interest rates at their present level, stresses Dan Harlow, deputy manager of the AXA Framlington American Growth fund.

The months of speculation and second-guessing are at an end as the Fed last night finally announced it is to taper its stimulus policies. In his final scheduled conference as Fed Chairman, Ben Bernanke and his fellow Fed governors indicated their increased confidence in the sustainability of the economic recovering by winding down the bond buying programme.

The fixation that markets have shown in recent months over the timing has been an unhelpful distraction and added to market volatility. It was always a case of ‘when, not if’ tapering would commence and we have believed that the underlying economy has been strong enough to support the commencement of tapering for the last few months. The recent extension of QE appeared at the time to be largely a function of the economic uncertainty created by political fights over the budget. Therefore, the recent reassuring Budget agreement coupled with the impressive economic data seen this month proved too great for the Fed to ignore any longer.

The Fed will now buy $75bn a month in mortgage and Treasury bonds as of January, down from $85bn. It will look to cut the monthly purchases by increments of $10bn at subsequent meetings. However, such moves will be measured and dependent upon further economic progress.

Investors gave the move their resounding approval, with the S&P closing up 1.7% to close at a new all-time high. The Street was relieved that this was a relatively small cutback in monthly bond purchases, as well as by the commitment to maintain a pragmatic approach going forward. Importantly the tapering announcement included a pledge to maintain interest rates at their present level until “well past the time that unemployment declines below 6.5%”. Not only did this mark an extension in the amount of time it plans to wait before raising its target for short term rates (previously it was at the 6.5% level), but the clarity and strength of this commitment means we are unlikely to see rate increases until well into 2015.

This move is another important step forward in the economic recovery and is in-line with our expectations. Importantly the vote of confidence the Fed has shown in the health of the US economy, along with the recent budget agreement, will only help improve both consumer and corporate confidence.

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