After much waiting and fanfare, the Federal Open Market Committee of the U.S. Federal Reserve announced on December 18 that tapering would begin. The committee decided to reduce its purchases of agency mortgage-backed securities from $40 billion per month to $35 billion per month and reduce its purchases of longer-term Treasuries from $45 billion per month to $40 billion per month.
The taper was not severe, and Fed Chair Ben Bernanke used his last press conference as head of the central bank to ease the markets into the transition. Equities rallied in the days following the announcement, and the yield on the benchmark 10-year Treasury note increased just slightly, about 5 basis points. Economists polled by Bloomberg expect the Fed to reduce the rate in measured increments over the next seven FOMC meetings, ending the program by December 2014.
There’s a lot to unpack about the decision, so let’s get started.