The announcement by the Federal Reserve that it will not begin reducing its purchases of U.S. Treasuries and mortgage-backed securities with newly created money (a.k.a. "Quantitative Easing" or simply, QE) was a surprise.
Or was it really?
You would have to count us among those who were surprised that the Fed decided to hold off on trimming its $85 billion per month on average security-buying spree. We fully expected that the Fed was going to announce that it would reduce its pace of acquisitions by somewhere between $10 and $20 billion per month, which we base on our assessment that the U.S. economy has finally begun to recover from a year-long microrecession.
But was it really a surprise to all investors across the board?
The reason we ask that question is because the unique measure of probability that we developed specifically to determine how likely that investors collectively believe that the Fed might announce that it would reduce its QE purchases this month, rather than in 2014, has been sending a very different signal for weeks:
As we can see in the chart, our estimated probability that the Fed would taper sooner peaked at 78% (with a typical margin of error of +/- 15%) on 31 August 2013. Since then however, that probability has itself tapered off, and going into 18 September 2013, the day of the Fed's announcement, it had been cut nearly in half to 42%.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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