What Happens When the Fed Stops Propping Up the Market?

There’s been some good economic news lately – a modest decline in the unemployment rate and encouraging data regarding consumer spending during the vital holiday season chief among them.


Traditionally, this would be great news for investors. But in today’s complicated financial marketplace, an improving economy means that the Federal Reserve Bank is likely to accelerate their  tapering of the economic stimulus know as Quantitative Easing. As a result, the markets have actually trended downward in response to this economic news. Reuters News reports:


Concerns that the Fed would taper its stimulus earlier than expected have weighed on the market for days. The three major U.S. stock indexes recorded their biggest drop in a month on Wednesday as traders took profits from the recent rally a day after a provisional budget deal was reached in Washington. The budget agreement removed a potential economic hurdle cited by the Fed in September when it chose to keep its stimulus intact.


Many market participants have expected the Fed to announce a cut in stimulus in March, but that timeline may have been accelerated by some in the wake of Friday’s better-than-expected November payrolls report. The Fed has said it would slow its $85 billion a month in bond purchases when certain economic measures meet its targets, including a drop in the U.S. unemployment rate.


What’s going to happen when the Fed begin to hasten the tapering of its “stimulus” program? It’s impossible to say for sure, but it seems certain that we’re in for an extended period of market volatility. An even more important concern is if the stock market can even function at all without the Fed support.


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