The Federal Reserve, in an announcement that slightly surprised the financial markets, announced today that it will reduce its $85 billion a month in bond purchases by $10 billion starting in January.
The move was anticipated, but most market-watchers expected the Fed to make the move early in 2014 instead of now. This week’s inflation report – with CPI running at just 1.2% over the last 12 months – kept the pressure off the Fed for immediate action.
The immediate effect on TIPS and Treasurys appeared minimal, with the TIP ETF trading at $110.69 at 2:45 p.m., down just 0.23% for the day.
The move is important, however, because it demonstrated that the Federal Reserve is willing to cut back and possibly end its program of bond-buying, which has been used to suppress long-term interest rates.
The TIPS market began pricing in this move six months ago, and so it is possible we won’t see a dramatic move upward in yields. I suspect, though, that yields will begin gradually rising in 2014.