A time to QE taper but not tighten

The US Federal Reserve (Fed) has announced that it will taper its Quantitative Easing (QE) purchases from $85bn to $75bn a month. At the same time it has strengthened its guidance on overnight interest rates. Markets have breathed a sigh of relief.

Surveys ahead of the Fed's decision put the chances of a QE taper at 30-50%, with most seeing it as a close call. Much of the uncertainty surrounded the tactics of the decision: the role of chair soon moving from Bernanke to Yellen; thin December market conditions; and markets still nervous from the impact of the May-June taper talk.

In the end the Fed has rightly focused on the economic fundamentals and announced that:

“in light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases”. The Fed has not set a fix course for further tapering, which will be taken in measured steps based on the economic data.