The Fed has signaled that its bond-buying program - designed to inject money into the economy - will be wound down, drawing a mostly cautiously positive reaction thus far from wealth managers.

The word “tapering” has become part of the investment
lexicon in recent months, referring to if and when the US Federal Reserve
reduces and eventually halts its program of buying bonds with freshly-minted
money. Now, at the end of 2013, the Fed has made its move.  

Ben Benanke, Fed chairman, has signaled that the world’s
most powerful central bank will run down bond-buying, showing that he and his
colleagues think the US
economy is now robust enough to live without the life-support machine of new
money.

The prospect of an end to quantitative easing has been one
of the reasons why emerging market indices, which had previously enjoyed the
benefits of this monetary stimulus, have languished relative to developed
equity markets this year. It has also seen the price of gold fall by the
biggest amount since 1981, since QE had previously encouraged buying of the
yellow metal due to fears that QE will stoke inflation and hit the dollar.

Speaking at his final press conference - Bernanke is
stepping down from the role that saw him handle the aftermath of the 2008
financial crash - Bernanke said: “Today's [Wednesday’s] policy actions reflect the
[Fed's] assessment that the economy is continuing to make progress, but that it
also has much farther to travel before conditions can be judged normal.”

The Federal Reserve announced a reduction in the pace of its
asset purchases in December, saying that the pace of purchases would decline to
$75 billion per month beginning in January next year from the current $85 billion
level. The Fed is cutting its Treasury and agency mortgage-backed securities
purchases by $5 billion in each case, leaving new purchase rates at $40 billion
and $35 billion per month, respectively.

Response

Wealth managers gave a mostly cautiously positive reaction
to the news.

“We’re pleased with the Fed’s decision, having long argued
that the last round of QE was too large and disrupted the proper functioning of
financial markets without meaningfully helping the labor market. This is a
step in the right direction,” Rick Rieder, chief investment officer of
fundamental fixed income at BlackRock, said.

“We think there is
ample evidence that the labor market is strengthening, if slowly, which is why
the Fed was able to make this decision. At the same time, wage pressures aren’t
there yet, helping to keep a lid on inflation even as some of the
dis-inflationary factors we’ve seen in energy and technology are actually
helping to lift productivity and growth. This is all good for the economy.
BlackRock has been calling for US growth of around 2.5 per cent in 2014, but we
could see an upside surprise on that number,” he said

“This won’t be a big
shock for bonds, because there’s still plenty of easy money in the global
financial system. That’s not to say rates won’t move higher over time. We are
looking for the 10-year US Treasury to inch up to 3.25 per cent or so by the
middle of next year. So-called spread sectors - high yield, commercial
mortgages and other asset-backed bonds as well as longer-dated municipal bonds - are all still better bets than Treasuries,” he said.

At UBS, the response was cautious.

The knee-jerk reaction in markets was, predictably,
negative. However, the statement that "it likely will be appropriate to
maintain the current target range for the federal funds rate well past the time
that the unemployment rate declines below 6-1/2 per cent, means that interest
rates are likely to remain loose for an extended period of time," Kiran Ganesh and Mads Pedersen, at the chief
investment office of UBS Wealth Management, said in a note.

“Just two Fed members (of 17) expect the first interest rate
hike in 2014, with 12 expecting the first hike in 2015, and 3 in 2016. This
revised outlook for interest rates, along with dovish commentary from Fed Chair Ben
Bernanke at the press conference, has led to a rally in most risky assets,” the
Swiss bank continued.

“Within equities, regionally, we continue to believe the US market should
enjoy the most solid macroeconomic support, and, as demonstrated by the
interest rate guidance, the Federal Reserve remains highly accommodative
despite the tapering announcement,” UBS said. It added that recent strong
housing data evidence suggested this market should withstand a cut in the
number of mortgage-backed security purchases.

It noted that the currency market impact of Bernanke’s
remarks have been muted so far.

“The decision to begin the tapering process in January…was
also accompanied (we think) more importantly by a decision to move expectations
away from a 6.5 per cent unemployment rates being the catalyst to the Fed raising
interest rates,” JP Morgan Asset Management Fusion funds manager Tony Lanning
said.

“It seemed clear that zero interest rates will remain in
place even when (if) unemployment falls below that level. They also highlighted
their preference for inflation to move closer to their 2 per cent target. We
believe this should now allow the markets to begin to re focus on fundamentals
which we feel continue to improve albeit slowly. The decision to begin to
withdraw the medicine should give markets comfort that the patient is indeed
recovering and that the economic recovery is real,” Lanning said.

At Saxo Private Bank, part of European-based investment and
trading firm Saxo, its chief investment officer, Teis Knuthsen, said: “It is
positive that the Federal Reserve has ended months of uncertainty regarding
tapering. My view has been for a while that tapering was required, not least
because of the drop in government bond issuance.

“If tapering is seen as hawkish, it is being countered by a
quite dovish forward guidance, with an implicit acceptance of a drop in
unemployment below the previous reference level of 6.5 per cent before rate
hikes become needed.”