By James Saft
(Reuters) – Coming months will answer decisively a question the Federal Reserve insists is already settled: is a tapering a tightening?
Score one for the Fed today: it cut purchases of bonds to a monthly $75 billion from $85 billion, but paired the move with a confection of sweeteners which touched off a startling rally in equities and only a small increase in long-term interest rates.
“Tapering is not meant to be a tightening,” Bernanke said after the Federal Open Market Committee announced the move. “The Federal Reserve means to keep the level of stimulus more or less the same.”
To judge by the reaction of the stock market – with the Dow Jones Industrial Average closing up 292 points – the moves the Fed announced must qualify as a loosening.
That may be because in addition to shaving $5 billion per month off of the amount it buys of both Treasuries and mortgage bonds, the Fed hardened forward guidance to indicate that rates could remain near zero “well beyond” the time unemployment drops below 6.5 percent.