Bernanke announced the beginning of the taper today in a surprise announcement. IMHO, this is a good thing that will increase confidence in the recovery. More to be said, but I’m at work.
DJIA is up almost 300 since the announcement.
What say you?
From what I’m reading the bounce is a result of the Fed saying that the economy is improving. I suspect that is more important than the small reduction in bond purchases.
Probably. Maybe. Bernanke also mentioned that part of the slowdown of the recovery is a lack of government spending. And he’s right.
Regardless, the beginning of the taper is an important signaling event even if the amount itself isn’t large compared to the overall $85 billion/month.
I agree, I think it is a good idea and justified. It should boost consumer and investor confidence that Great Recession is nearly over.
I think the bounce is more likely the result of 1. the taper being smaller than feared, and 2. the Fed announcing that they would extend the short term low rates for longer than their previous announcements.
The market loves the program. Previous suggestions or fears that it would end have tanked the market.
That’s why I don’t give any credence to market analysts on CNBC or other financial media. Every other time the Fed meets to discuss tapering, analysts predicted a sell off and the markets fell in anticipation of a taper. Now, we have a real taper, and markets leap up. So much for what “experts” have to say on the subject. No one can predict the markets with any accuracy.
No. When the Fed buys US bonds, it returns the interest to the Treasury. Last year that came to $90 billion. To put that in perspective, Head Start costs less that ten billion; the national park system about $3 billion.
Since people use deficits and debt as excuses not to do things that are good for the country, I’d say the Fed should INCREASE bond purchases. Maybe if the Fed bought enough debt, we could fund the whole thing off interest from the debt alone.
Doesn’t this also mean that bank interest rates will go up?
Plus why would the feds sell off GM at a loss with signs of an improving economy?
I understand Las Vegas better than I do the stock market.
Marketplace covered this today. Yes, reduced demand for bonds will increase interest rates - but they expect this to also increase demand from the non-Fed market, which will decrease them again.
The purpose of the GM bailout was to get them on their feet and get out, not to make money. The benefits to the economy from the bailout far outweigh the reasonably small loss.
If I recall correctly, the auto bailout ended up costing almost 12 billion but the impact of GM & Chrysler failing was estimated as no less than 100 billion.
[QUOTE=The Week]
The Treasury also points out that while it lost money on GM, taxpayers came out ahead when you look at the entire TARP bailout, of which the auto bailout was a relatively small part. In total, Treasury spent $421.8 billion to rescue financial institutions and the auto industry, and it has recovered $432.7 billion so far — a tidy $10.9 billion profit — including the GM losses.
[/QUOTE]
Also, the car biz has been doing much, much better than the general economy for some time now, to the point that continued economic recovery is imo not going to provide as much up-side to car manufactures as you might think.
I say I still don’t understand QE so this is fairly meaningless to me. :o
It’s only a profit if you don’t factor in the time value of money (in this case, the interest on the bonds that funded TARP).
Those interest rates were pretty low. And the profit does not take into account the cost to the economy if the banks had failed, which would be far greater than GM going under.
Maybe the Fed will stop whining about nobody saving any money. I guess they haven’t noticed that money market accounts pay about 0.25 % and an 18 month CD pays around 1.7%.
I believe that the market is somewhat overinflated because of that. But it’s pretty much the only place to get any kind of return so us middle class peons end up taking a chance of a significant loss vs making next to nothing otherwise.
Of course rising interest rates are a double edged sword but overall I think a modest rate increase would be a good thing on balance.
Interest rates also need to go up for the simple reason that some time in the future we will have to lower them again to stimulate the economy (i.e., the stock market, i.e., the DJIA and NASDAQ indexes.) 
I think the thread title is insanely misleading. The reason why the stock markets went up was because of everything else the Fed did, not the tapering of bond purchases.
Remember that the purchase of bonds was intended to make borrowing cheap, thereby making more cheap money available. The worry that the fed would prematurely taper its bond purchases was to withdraw this cheap money before the economy recovered (i.e. tighten the money supply).
What the fed did was the stop QE (i.e. the bond purchases), but in return, the fed made an incredible statement:
CRAZY. The fed saying that they’re committed to keeping interest rates low to focus on unemployment? Complete opposite of the austerity measures in Europe. Maybe they won’t do it via QE any more, or less reliant on QE, but we already knew that the fed would taper QE eventually. What Bernake said was even better - committing to keep interest rates low long term, or at least until it the market recovered.
You NEVER see such clear fed language, ever. If the fed talks like this, committing to low interest rates, you know that the fed wants a market reaction. Hell, Greenspan made his name by obfuscating and “non-comments” so as to mask the fed’s intentions, this kind of language would be completely unheard of.
THAT is what caused the spike. Not the taper, which has been practically superceded by Bernanke’s comments.
Not to be picky, but the title doesn’t mention the stock market. 
Fine. The thread title and OP.
To be specific, I am referring to the following statements:
“The Fed begins to taper. Good” and
“DJIA is up almost 300 since the announcement.”
Incidentally, picking apart the OP, the reason why the market went up was not “confidence in the recovery”, but rather the fed outright stating that easy money was not going to go away any time soon. In fact, the statement by the fed outright says that there ISN’T sufficient recovery (i.e. unemployment is still high), and that easy money will remain until there is sufficient recovery.
Well, channeling Benjamin Graham, let’s just say that Mr. Market goes up. Mr. Market goes down. Explanations after the fact are all equally valid and may or may not apply to Mr. Market, as he does what he wants.
I’m not saying it was a bad thing, just that calling it a money-maker is a bit misleading.