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Today was supposed to be the day the Federal Reserve decided to start tapering off QE3. “D-Day,” that bastion of understatement CNBC was calling it.
As it turned out, Fed tapering wasn’t even close. Nine of the 10 members of the Federal Open Market Committee voted against scaling back its $85 billion-dollar-a-month bond-buying program. Most economists predicted Fed tapering would start this week.
As is often the case on Wall Street, it was a whole lot of fuss about nothing.
The collective sigh of relief among investors was obvious. Prior to the 2:00 eastern time announcement, stocks were down slightly on Wednesday. By 2:12, they were already up a full percentage point. In fact, both the S&P 500 and Dow Jones Industrial Average are currently flirting with new all-time highs.
The pre-announcement panic and subsequent rally after tapering was avoided both seem a bit short-sighted. Quantitative easing can’t go on forever. QE3 has been going on for a full year now – already longer than QE2 lasted. Eventually, the Fed will have to let the U.S. economy recover on its own.
With housing starts way up and the unemployment rate at its lowest level in nearly five years, the U.S. recovery is making steady progress. “A moderate pace” is what Ben Bernanke just called it in his monthly press conference.
For now, moderate growth isn’t good enough. Soon enough, however, Fed tapering will begin. When it happens, it will be a good thing. It will mean that the Fed thinks U.S. economy can stand on its own, without their help.
And yet, when it happens, it will mean mass chaos on Wall Street.
“D-Day” will have to wait for another day. In the long run, it will be a good thing for investors.