FORTUNE -- The Federal Reserve's taper may turn out to be a lot less terrible than we thought.
For more than a year, investors have been bracing for the beginning of the end of the Fed's stimulus program. So on Wednesday when the Fed finally announced it would pull back a little, how far did stocks fall?
Instead, they rose, a lot, by nearly 300 points. Bonds were down slightly. What gives?
The taper, it turns out, for the stock and bond market -- and perhaps even the economy altogether -- matters a lot less than we thought.
One of the main concerns about the Fed pulling back on its bond buying program is that it would cause interest rates to rise. But that was bound to happen anyway. Interest rates tend to rise when the economy improves. And the economy has been improving. So interest rates are up. The yield on the 10-year U.S. Treasury bonds has risen to just under 3% from around 2% at the beginning of the year. It's not clear how much that has to do with the taper.
Even more important, that rise in interest rates doesn't seem to be slowing the economy. Last month's jobs report was once again better than expected, and the unemployment rate fell to 7%, the lowest it has been in five years. So clearly higher interest rates are not spooking the economy.
And the taper, at least so far, is tiny. The Fed is only reducing its bond buying program by $10 billion. That means the Fed will be buying 11% fewer bonds than we thought. Of course, the Fed is likely to pull back further. But even if they do, it will be a long time before that makes a big dent in the Fed's total bond holding, which is expected to cross $4 trillion this week.
There has been a debate over what matters more in the Fed's bond buying program: the stock or the flow -- how much bonds the Fed has, or how much it is buying. Recently, economists have come to the conclusion that the flow matters more than we thought. But perhaps not that much more.
And then there's stocks. Some strategists have long contended that the only reason the market has been going up, or at least going up as much as it has, is Ben Bernanke. If that was true, then the announcement that the Fed will be pumping a little less money into the market should have made stocks drop, not rise.
What this says, at the very least, is that the recovery in the market, and perhaps the economy as a whole, has less to do with the Fed than we thought. Instead, it appears that the market is rising because the economy is improving, and in the end that's what matters. Compared to that, whether the Fed tapers or not just isn't nearly as important.
There is more than one way banks can run afoul of regulators.Stephen Gandel, senior editor - Dec 11, 2013 2:39 PM ET
A new study refutes the idea that a "global savings glut" caused the financial crisis.
FORTUNE -- You would think that having an extra $70 trillion dollars lying around would be a good thing. But then NPR had to go and ruin that.
Back in mid-2008, when the financial crisis was still gaining its legs, the popular radio show This American Life, which is broadcast on National Public Radio, aired an episode MOREStephen Gandel, senior editor - Dec 2, 2013 1:06 PM ET
Banks are increasing their home equity lines of credit business, but such loans made during the housing heyday could still haunt them.Nin-Hai Tseng, Writer - Nov 27, 2013 11:19 AM ET
The nominee to be the next Fed chief breezed through her Senate confirmation hearing.
FORTUNE -- As in most job interviews, Janet Yellen on Thursday didn't say anything all that controversial in her appearance before the Senate Banking Committee. Her confirmation hearings to be the next Fed chair were by-the-book and informative, but ultimately unsurprising.
Senators got a better sense of what kind of monetary leader she will be -- specifically, her MORENin-Hai Tseng, Writer - Nov 14, 2013 2:24 PM ET
In the Fed's worst case scenario test, the nation's unemployment rate leaps to 11.3%, house prices fall by 25%, and the Dow Jones industrial average plunges nearly 50%.Stephen Gandel, senior editor - Nov 1, 2013 2:18 PM ET
Slower rising prices might have given Ben Bernanke an easy taper escape.Stephen Gandel, senior editor - Sep 18, 2013 2:30 PM ET
The former presidential candidate has an outside-the-box suggestion for the next Fed chair.Stephen Gandel, senior editor - Aug 9, 2013 10:41 AM ET
On Thursday, the S&P 500 hit an all-time high. Stocks will have to leapfrog a drop in earnings for the index to climb even higher.Stephen Gandel, senior editor - Mar 29, 2013 12:55 PM ET
If interest rates were to suddenly rise to their historic levels, the Federal Reserve's investment portfolio could be doomed.
By Rob Curran
FORTUNE -- Federal Reserve critics have long warned that quantitative easing may result in a dangerously bloated balance sheet at the central bank, but it's never been clear why the Fed's internal finances should matter to you and me.
Now Dallas Federal Reserve President Richard Fisher is arguing that the MOREJan 18, 2013 8:25 AM ET
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