The Stock Market’s Embarrassing Fall after the Fed Reneged on the Taper

Alan Reynolds Unlike nearly everyone else, I have argued that the Fed’s latest round of “quantitative easing” is not why stock prices went up until recently, and that “tapering” Fed bond purchases would have had only a negligible effect on long-term interest rates.    This was a testable hypothesis. If I was wrong, the Fed’s unexpected decision to back away from its previously-expected tapering of bond purchases would have been greeted by a significant, sustained rally in stock and bond prices. That didn’t happen. Instead, stocks fell for at least five days in a row and bond yields barely budged until stocks swooned (triggering a modest flight toward safe havens). Before the Federal Reserve’s “surprise” at 2 p.m. on Wednesday September 18, nearly every financial reporter was confident the yield on 10-year Treasuries had increased to 2.86 percent from 1.66 percent in early May, simply because Fed officials hinted in May that they might begin to slow the pace of bond-buying by September. If that story had been true, we should have expected bond yields to retrace most of their rise as soon as the Fed removed that fear of the taper. Instead, the 10-year bond yield ended the week of the Fed announcement at 2.75 percent – no lower than the average yield in August (2.74) and merely a trivial 11 basis points lower  than the day before the Fed’s surprise. Financial analysts and reporters were likewise certain the stock market had been terrified ...
Source: Cato-at-liberty - Category: Health Medicine and Bioethics Commentators Authors: Source Type: blogs