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Investing Specialists

Fed Decision More Tactical Than Strategic

Despite the Fed's taper delay, the end of the bond-buying program is a question of when, not if.

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Looking at returns this week, it seems the stock and bond markets really didn't care much about anything other than the Fed's decision not to taper bond purchases. Although no one was expecting a big taper, it was still surprising that it did absolutely nothing after three months of talking up a potential reduction. The initial reaction to the no-taper decision sparked large rallies in both stocks and bonds after the announcement Wednesday. Reality settled in a little bit later in the week--markets seemed to have second thoughts as it occurred to participants that maybe they too should be concerned about slowing growth forecasts and potential fiscal disarray in the weeks ahead. Additionally, rates didn't back off all that much as tapering still seems to be an issue of when, not if, and rates were not going back to their old lows.

Inflation data released this week was tame, which effectively gave the Fed more room to operate its loose money policies. The year-over-year averaged inflation rate still remains a remarkably low 1.7%, and the single-month rate of Consumer Price Index inflation was just 0.1%. Housing data was mixed with existing-home sales and builder sentiment exceeding/matching recovery highs, as housing starts remained lethargic as homebuyers snapped up available supply immediately while avoiding new homes that couldn't be closed on right away. Unfortunately, even a modest slowing in new housing growth is bad news for the economy. Also, manufacturing appeared to make more headway in August after a generally rough 2013 that saw continually slow growth rates.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.