The tapering of the QE3 program will reduce the amount of money being pumped into the global economy from US$85 billion per month to US$75 billion.
The Fed will reduce its Treasury bond purchases from US$45 billion a month to US$40 billion, and its mortgage-backed securities purchases from US$40 billion a month to US$35 billion.
AMP Capital chief economist Shane Oliver said the tapering does not come as a surprise, given it was foreshadowed by the Fed in May 2013.
But he pointed to the Fed’s “dovish guidance” on the outlook for interest rates: “The clear message is that tapering is not monetary tightening and does not mean that the first [US] rate hike is any closer,” Mr Oliver said.
The current round of tapering is very different to the “premature and arbitrary” ending of QE1 in March 2010 and QE2 in June 2011, when the Fed went from US$95 billion and US$75 billion respectively in monthly bond purchases to zero overnight, he said.
The end to QE1 and QE2 contributed to 15 to 20 per cent sharemarket falls at the time, Mr Oliver added.
“This time around, QE is only being reduced gradually and only because the economic data shows the US economy improving,” he said.
The implication for investors is that the Fed remains market-friendly, said Mr Oliver.
“The pace of quantitative easing is only slowing gradually. This is contingent on the US economy continuing to strengthen and rate hikes are unlikely until 2015, at least,” he said.
In a research note on the topic, Colonial First State Global Asset Management (CFSGAM) said the reaction in bond markets to the news has been relatively muted.
“The bond market is not expected to suffer a significant sell-off in the short term,” the CFSGAM note said.
Despite concerns that US equities may find the ‘beginning of the end’ of QE3 a challenging period, the US equity market has responded positively to the Fed’s statement, said the note.
“Although the moderation in the Fed’s stimulus program saw an initial decline, the dovish tone of the forward guidance and expectation that the US economy should continue its cyclical recovery through 2014 has supported the equity market,” CFSGAM said.
