Tapering off the table - for now

Investment advisers and their clients who have significant equity market commitments can take comfort in last week's Federal Open Market Committee statement that the Fed will not yet begin to taper. The statement said the Fed will continue its current policy of buying $40 billion a month in agency mortgage-backed securities and $45 billion in longer-term Treasury securities. For stock market investors, the announcement means the stock market is unlikely to be hurt by Federal Reserve actions in the near future, and probably not until after Congress reaches a settlement on budget issues and the sequester. That's because fiscal policy, i.e., the sequester, “is restraining economic growth.” Another factor influencing the Fed is that inflation remains low, even below its target of 2%, so it is confident that its easy money policy is not in danger of triggering runaway inflation. Besides taking Fed action off the table for at least a few months as a market concern, the statement provided indicators for investors to watch for that could cause the Fed to change its stance and begin to taper its monetary infusion. The first is an improvement in the employment outlook, e.g., if the number of first-time unemployment claims falls significantly and the unemployment rate drops below 7%. The second is a change in inflation. If the rate climbs above the Fed's target of 2% for more than a month or two, the Fed could change course. Despite the Fed's reassurance that it is maintaining the status quo, it does not mean that advisers and their clients can relax and plunge headlong into the stock market. There is still the issue of fiscal drag mentioned by the FOMC, and the uncertainty about what will come out of Congress, if anything, as a result of the budget and debt ceiling negotiations. If the two parties in Congress should come to an agreement on the budget and the debt ceiling in the next two months, that will be a sign to prepare for the Fed to begin tapering its buying activities. But in the meantime, advisers and clients don't have to take action to change an investment stance because of possible Fed actions. One source of uncertainty has been removed.