After Fed’s great unwind begins, the stock market yawns

NEW YORK – The first month is in the books for the Federal Reserve’s years-long process of pulling the plug on its bond-purchase program, and markets took things in stride.

It’s a massive undertaking for the Fed, whose investment portfolio swelled to nearly $4.5 trillion. Economists credit the program with helping push U.S. stock funds to returns of more than 300 percent since the spring of 2009.

A worry was that the program’s end would mean pain for the stock market, just like it provided succor on the way up. In the past, even the hint of a slowdown in bond purchases was enough to send investors into a “taper tantrum” and cause interest rates to jump.

But the stock market calmly set more records in October, as the Fed let $10 billion of Treasurys and mortgage-backed securities in its portfolio mature without reinvesting the cash. The pace will gradually rise to $50 billion per month by the end of next year.

The bond market was more exciting in October, as the yield on the 10-year Treasury touched its highest level since March. Much of the increase was the result of a strengthening economy, along with anticipation of President Donald Trump’s choice for the next Fed chair.

A lot is riding on whether markets can remain calm as the program further winds down. Studies have suggested it was powerful enough to pull the yield on the 10year Treasury note down by 1 percentage point as of the end of last year, when it was around 2.47 percent.

Here’s a look at two reasons why analysts say the market has been so calm about the Fed’s balance-sheet moves so far:

This was exactly what the Fed wanted to happen. Following the 2013 “taper tantrum,” the central bank has gone to great lengths to telegraph its moves.

Fed officials have said they want the drawdown of the central bank’s balance sheet to be akin to “watching paint dry,” and the program is supposed to run quietly on autopilot in the background.

With Trump tapping Jerome “Jay” Powell to be the next chair of the Fed, economists expect this to continue. Powell was already a Fed governor, and economists say he is not as aggressive about raising interest rates as some of the other finalists would have been.

The economy is better able to stand on its own without as much Fed support. The economy grew at a 3 percent annual rate last quarter, even though hurricanes shut down a wide swath of businesses. The unemployment rate is also at a 16-year low, and other economies around the world are hitting a higher gear.

It’s a much different picture than when the Fed was buying bonds in the years following the Great Recession. Then the economy needed the stimulus. Plus, the cumulative effect of all that aid for the economy means conditions are relatively easy.