The Federal Open Market Committee announced Wednesday that it will in fact begin tapering purchases of both Treasurys and mortgage-backed securities (MBS) by $5 billion each.
Defying conventional wisdom from analysts, beginning in January, the committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month – a 12.5% cut.
The committee will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month, an 11.1% cut.
The move marks the beginning of the end to what is the third round of quantitative easing, which began in September 2012. QE is a monetary policy implemented to prop up parts of the economy. Zero interest rates on Federal lending, part of the policy, will remain unchaged. By purchasing MBS and Treasurys, the Fed is able to create demand in those markets, thereby keeping liquidity intact.
The major stock indices reacted favorably to the announcement, with the Dow Jones rising roughly 178 points, while the Nasdaq and S&P 500 rose 0.39% and 0.93%, respectively.
The HW 30 — the HousingWire index of stocks impacting housing finance — also rose nearly 2%.
The 10-year Treasury note also rose after the Fed announced plans to reduce its monthly purchases.