Fed Announces Tiny Taper While Pledging to Remain Accommodative

The Federal Reserve announced it was reducing the long-term assets it buys by $10 bln a month, evenly divided between mortgage backed securities and Treasuries. The 10-year Treasury yield rose a few basis points and the dollar firmed slightly, but quickly reversed, with now the dollar weaker and yields lower within 10 minutes of the Fed's statement. Given that only about a third or so of participants expected this, the initial market reaction is tame.

The Fed's statement is the most optimistic in quite some time. It sees the risk to the outlook for the economy and labor market to be nearly balanced. It recognizes that the persistently low inflation may pose risks to economic performance. The statement also underscores that the Fed will have a highly accommodative stance for a considerable time even after the purchase program ends and well past the time that unemployment falls below the 6.5% threshold.

There was only one dissent that was from the Boston Fed President Rosengren, who believes the unemployment rate is still too high and inflation too low to being tapering.

Bernanke's press conference will add more color and details. Given that Yellen will likely be confirmed this week, Bernanke is likely to resign shortly thereafter.