Dec 18 (Reuters) - The Federal Reserve started its long-awaited reduction in stimulus, cutting its monthly purchases to $75 billion a month, saying it expects to keep reducing asset buys in 'measured steps' if economic figures continue to improve.
After an initial decline, equity markets rebounded, suggesting investors view the Fed's action as confirmation of improving economic fundamentals.
KEY POINTS: * The Fed sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised. * The Fed trimmed equally from mortgage and Treasury bonds, reducing to $35 billion in mortgage securities and $40 billion in Treasury bonds. * The Fed's asset purchase program, a centerpiece of its crisis-era policy, has left it holding roughly $4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.
COMMENTS: QUINCY KROSBY, MARKET STRATEGIST AT PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY:
'Now we know how the Fed plans on exiting, we've gotten a template. The 10-year (Treasury yield) is telling you 'it's happened. Let's move on. Let life continue'.
'Janet Yellen's imprint is on this move and that's very good for the markets. It's clear from moves in bonds and equities that the markets discounted this in September.'
SCOTT CLEMONS, CHIEF INVESTMENT STRATEGIST FOR BROWN BROTHERS HARRIMAN WEALTH MANAGEMENT:
'We have to remember that the (even with the tapering) Fed is still going use $75 billion on monthly asset purchases. This is a modest change, not a big one, and it shows that they are not in a rush. The Fed is using a very careful language that they are going to continue to support the economy. That's part of the reason why the stock market is rallying.'
TANWEER AKRAM, SENIOR ECONOMIST, FIXED INCOME, ING INVESTMENT MANAGEMENT, ATLANTA:
'Despite today's tapering, monetary policy will remain accommodative next year and possibly beyond. The FOMC reaffirmed its commitment to retain accommodative monetary policy for a considerable time after its large-scale asset purchase program ends. It believes that low ranges will be appropriate to maintain well past the time that the unemployment rate declines below 6.5 percent, if inflation remains below its long-term objectives, as currently projected in the central tendency of its forecasts. The FOMC wants to support the mortgage markets and the ongoing housing recovery.'
STEVEN RICCHIUTO, CHIEF ECONOMIST, MIZUHO, NEW YORK:
'The makers of domestic monetary policy did the unexpected and tapered QE by $10 billion. Even though we were solidly in the March 2014 camp, this is not the first time the FOMC has opted to slow the pace of purchases.
'The question is whether this time will be the charm or if this is just another false start. We will be watching not only the post-holiday sales but also the shape of the yield curve to assess the quality of this decision. If the belly of the curve gives up substantial ground then the auto industry and the housing industry are apt to take a hit.
'If, on the other hand, rates remain basically unchanged and sales remain firm than the Committee will feel it has made the right decision. Only time will tell if the $10 billion taper was the right decision. My view remains that in a credit cycle it is the FOMC's responsibility to remain accommodative until the economy has achieved a self-sustaining growth trajectory.
'I am afraid that taking the punch bowl away before the party has a buzz will prove to be a mistake. By moving very slowly and keeping an eye on the disinflation environment the FOMC hopes to avoid a sudden adverse move in the financial markets. We still believe that targeting long rates may still be on the table should the markets respond opposite to their wishes and the data takes a turn for the worse.'
TODD SCHOENBERGER, MANAGING PARTNER AT LANDCOLT CAPITAL IN NEW YORK:
'I think the Fed caved to social pressure and political pressure. It threw everyone a bone who had been screaming for tapering, but a $10 billion change won't be missed. It won't impact the economy. A change this small is almost like it had done nothing at all. This will get the bulls running again, but it is purely strategic. This will calm the people who have been wanting a taper, but there is no risk of the economy stalling and the Fed being put in the position where it has to then re-expand QE. If this had been a move of $20 billion, that would be more notable.'
CARY LEAHEY, SENIOR ADVISOR, DECISION ECONOMICS, NEW YORK:
'This more tentative endorsement of a lower unemployment rate threshold together with the tapering today, rather than in early 2014, suggest the hawks are beginning to gain the upper hand. The composition of the FOMC is becoming more hawkish in 2014 and the expected appointment of Stanley Fisher to vice chair, who is very skeptical of precise forward guidance and QE, may end up bolstering the hawkish case next year.'
ALAN RUSKIN, GLOBAL HEAD OF G10 CURRENCY STRATEGY, DEUTSCHE BANK, NEW YORK:
'This is a very dovish taper-lite where the Fed has done its utmost to provide an offset with its forward guidance, notably on the inclusion of inflation in the unemployment threshold. This has clearly tempered the interest rate response which is exactly what they would have wanted. Risk has responded positively almost immediately, which should be ample vindication that the Fed should not have waited, and fears of a negative impact on financial conditions were exaggerated.
'The action today finally gets the uncertainty of when they would taper out the way which is another helpful factor for risk. The yen will remain the favored funder, but the dovish taper will set the tone for a somewhat softer dollar against most other currencies into year-end.'
DANIEL HECKMAN, SENIOR FIXED INCOME STRATEGIST AT U.S. BANK WEALTH MANAGEMENT, KANSAS CITY, MISSOURI:
'A lot of people had gone short into this meeting expecting some announcement even if they had not felt confident in voicing that. Ultimately, this will allow the yield curve to steepen a little bit more especially if we get some more encouraging economic data. The announcement is bond-market friendly in terms of the limited size of the tapering so we're seeing some short-covering.
RICHARD FRANULOVICH, SENIOR CURRENCY STRATEGIST, WESTPAC, NEW YORK:
'The forward guidance from the Fed has offset the tapering announcement. The Fed has come along and said we won't be hiking until we're well past 6.5 percent in the unemployment rate. That pretty much did it for the dollar.'
BRIAN J. JACOBSEN, CHIEF PORTFOLIO STRATEGIST, INVESTMENTS GROUP, WELLS FARGO FUND MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
'It's going to be a bunny hill, not a cliff for QE3. It will slowly fade into the distance as the labor market continues to slowly heal. QE3 didn't do much to affect inflation, which is why the Fed is enhancing its forward guidance. Even that enhancement might not be enough to make a material difference.'
ERIK DAVIDSON, DEPUTY CHIEF INVESTMENT OFFICER, WELLS FARGO PRIVATE BANK, SAN FRANCISCO:
'We were surprised about the decision to taper, but given the news this (market move) was as we expected. It was almost a no-lose situation with the uncertainty removed from the market place.
'The reason the market is up as it is is this is 'bad news' investors have been waiting for and is finally out of the way. It is fodder for possibly better markets because it affirms the economy is healing.
The Fed 'enters int
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