Fed tapers another $10 billion

    Published: Wednesday, 19 Mar 2014 | 3:22 PM ET

By: Jeff Cox | Finance Editor

At its first meeting under new Chair Janet Yellen, the Federal Reserve agreed to dial down its stimulus package another notch, and changed its view on when interest rates will rise.
Despite a seemingly dovish tone, markets recoiled at remarks from Yellen, who said interest rate increases likely would start six months after the monthly bond-buying program ends.
Stocks tumbled as Yellen spoke at her initial post-meeting news conference, with the Dow industrials at one point sliding more than 200 points before shaving those losses nearly in half. Short-term interest rates rose appreciably, with the five-year note moving up 0.135 percentage points. The seven-year note tumbled more than one point in price.
In moves widely anticipated by financial markets, the Fed Open Market Committee voted to reduce the pace of its monthly asset purchase program by $10 billion to $55 billion—a continuing process in the market known as "tapering."
At a news conference following the release of the Fed Open Market Committee statement, Yellen defined a "considerable period" of time it would take for interest rates to rise after the end of quantitative easing to be about six months. That would still take rate hikes into 2015, about in line with market expectations, but traders still were rattled.
Separately, the FOMC amended language that previously indicated the U.S. central bank's key policymaking body would begin to consider raising interest rates once the national unemployment rate hit 6.5 percent. The new change gives the Fed leeway in deciding when to hike rates regardless of where the jobless number, currently at 6.7 percent, gyrates.
Financial markets seemed a bit confused by the decision, though it seemed to mirror expectations.
"Exactly what we expected, but clearly markets reacted a little bit," said Todd Hedtke, vice president of investment management at Allianz Investment Management. "What didn't occur was a little more accommodative stance. With the China (economic) numbers recently and maybe even Ukraine and some softer data, there was a certain faction of folks in the market who were expecting to see that accommodating verbiage a little stronger."
Paul Ashworth, U.S. economist at Capital Economics, noted: "What we hadn't anticipated is that FOMC participants would raise their interest rate projections. The median forecast now puts the fed funds rate at 1.00 percent by end-2015, up from the 0.75 percent projection made last December, and 2.25 percent by end-2016, up from 1.75 percent.
Market pros said there is a feeling that rate increases, while still a ways off, could move more quickly than expected once they start, as indicated in economic projections that accompanied the FOMC statement.

Andrew Harrer | Bloomberg | Getty Images

Janet Yellen, chair of the U.S. Federal Reserve.

"The implication is we're going to go faster," said Kathy Jones, fixed income strategist at Charles Schwab. "Oddly enough, the expectations for economic growth have been brought down except for unemployment. It's a very mixed bag."
The moves mark the first key decisions from the Fed since the ascent of Yellen, formerly the vice chair and head of the Fed's San Francisco branch. She takes over for Ben Bernanke, whose eight years at the helm marked a historically easy approach to monetary policy that has seen the central bank balance sheet balloon past $4.2 trillion.
Taken together, the decisions are indicative that the Fed will maintain its dovish approach.
The statement passed on an 11-1 vote, with Narayana Kocherlokota voting against.
"The bond market immediately sold off in response to the statement, but appears to be taking the opposite view to Mr. Kocherlakota sensing perhaps that short-term rates are set to move higher," Andrew Wilkinson, chief market strategist at Interactive Brokers, said in a note. "The shift higher in bond yields seems at odds with the dovish tone to the statement."
In a statement detailing the decision, the Fed used its most pessimistic language in months to describe conditions, saying "economic activity slowed during the winter months, in part reflecting adverse weather conditions."
The committee altered some of its language when it came to unemployment and inflation targets. Fed members said they will use "progress—both real and expected—toward its objectives of maximum employment and 2 percent inflation."
The language reflected the committee's desire to use "forward guidance" rather than concrete numbers in determining the future course of interest rates.
—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.

http://www.cnbc.com/id/101507905