The Federal Reserve has decided that tapering will continue.
The Federal Open Market Committee (FOMC), the arm of the Fed that determines interest rates and makes open market transactions, decided in its latest meeting that the Fed will purchase only $65 billion in mortgage-backed securities and Treasurys each month. The move represents a further, steady dialing back of the purchases, which constitute a stimulus policy known as QE3 – or the Fed's third round of quantitative easing. At its December meeting, the Fed decided to cut QE3's initial monthly purchases of $85 billion to $75 billion.
Central bank policymakers decided to taper despite some tepid economic readings, including a weak December employment report. That month, U.S. employers added only 74,000 jobs, the Labor Department reported. However, committee members felt the labor market is altogether improving.
"Labor market indicators were mixed but on balance showed further improvement," the committee said in a statement.
Likewise, while the Fed often has said that tight fiscal policy is a drag on economic growth, central bankers this month pointed to growth in spite of restrained government spending.
"Fiscal policy is restraining economic growth, although the extent of restraint is diminishing," the committee said, later adding that members believe improving economic growth is a sign of underlying strength, considering "the extent of federal fiscal retrenchment since the inception of [QE3]."
The committee also noted that inflation expectations are still stable and that broader economic growth has picked up, though the housing recovery has slowed.
One of the more surprising things about this tapering decision is that the FOMC was unanimous in making it – something that hasn't happened since June 2011. This shows that the Fed is serious about staying on the tapering path, one analyst says.
"To me this is a sign that for the Fed, they are very aware of the fact that signaling their intent is as important as the action itself," says Putri Pascualy, a managing director with Pacific Alternative Asset Management Company.
The fact that this unanimity comes as Chairman Ben Bernanke is stepping aside for incoming Chairwoman Janet Yellen is also important, Pascualy says, as it shows Bernanke is "handing over the reins to Janet Yellen with the message that a calm steady hand, with the conviction in the path that they've chosen, is important to them."
Barring any major economic shocks, Pascualy says, the current market expectation is for a $10 billion reduction in monthly asset purchases at each of the subsequent FOMC meetings.
The question is whether that will roil a stock market that already has posted some significant declines this week. Fed asset purchases had helped the stock market to reach record highs, reducing the yield on assets like Treasurys and sending investors on a hunt for higher-return assets like stocks. But over the last week, the U.S. stock indexes have started to fall. The Dow Jones industrial average has fallen more than 700 points, or nearly 4.4 percent, over the last five trading days. On Wednesday alone, the index was down by more than 200 points shortly after the Fed's announcement.
Yet many analysts believe a taper largely was priced into the market, as investors saw the move coming thanks to Fed signals. Even if the stock market slips on tapering news, as it did on Wednesday, recent declines are part of normal market fluctuations, another expert says.
"This is a market that's long overdue for a correction, regardless of whether or not the Fed is tapering," says Greg McBride, senior financial analyst for Bankrate.com. "Markets don't go straight up, and even healthy markets need a correction every so often, and we're overdue."