The US has tapered once again.

Janet Yellen announced yesterday that the US economy was back on track, or at least on the track of getting back. This will then reduce the amount of asset purchases to $55 bn a month, which is a cut of $10 bn from January. ($30 bn Government bonds, $25 bn agency MBS)

They continue to maintain that the Fed would keep interest rates low for a while even after asset purchases have stopped. Expectations are that by September or so there will be no more asset purchases.

(FOMC Statement)

Yellen also said the Fed wouldn’t look for a 6.5% unemployment number before it raised rates, a change from the earlier stand. US Unemployment is at 6.7% so the lifting of this number should have been viewed as positive – since the fall below that 6.5% mark should not have caused fear that the Fed will raise rates. But we can understand it differently – that unemployment is no longer a concern, and therefore the removing of stimulus will be accelerated.

Finally, the Fed statement says that rates will remain low for a considerable time after asset purchases have stopped. But there’s a twist, that makes Yellen look like a short-term trader:

And, when asked to define “a considerable time,” Ms. Yellen responded, “This is the kind of term that’s hard to define, but it probably means something on the order of around six months or that kind of thing.”

Which means, by early 2015, we see Fed rates go up? They think rates will be at 1% by 2015 and 2% by 2016. This indicates that the 10 year bond, on the back of both higher short term rates and lack of Fed buying, would go up to 5%+ in 2016.

Does the cut affect the world? Well, for India at least, foreign investors have been continuously buying in the last three months. There is no stopping them till now. Will this be the game changer?

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